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Dual liquidity crises under alternative monetary frameworks

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  • Winkler, Adalbert
  • Bindseil, Ulrich

Abstract

In a dual liquidity crisis, both the government and the banking sector are under severe funding stress. By nature, dual crises have the potential of being particularly disruptive and damaging. Thus, understanding their mechanics, how they unfold and how they can be addressed under various monetary and international financial regimes, is crucial. We capture the logic of a dual crisis through a new, rigorous approach. A closed system of financial accounts allows for a systematic comparative review of underlying liquidity shocks as well as built-in liquidity buffers, including their limits beyond which a credit crunch materializes. Based on this we are able to (i) make precise the otherwise vague interpretations of liquidity flows and policy options; (ii) compare capacities to absorb shocks under alternative international financial systems; (iii) explain how various constraints interact; (iv) draw lessons for achieving higher resilience against self-fulfilling confidence crises. Most importantly, we analyze the role of a number of potential constraints to an elastic central bank liquidity provision, namely the availability of central bank eligible assets, limits deliberately imposed on the central bank`s ability to lend to or purchase assets of banks and governments (including monetary financing prohibitions), and limits in a fixed exchange rate regime relating to the gold or foreign currency reserves of the central bank.

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  • Winkler, Adalbert & Bindseil, Ulrich, 2012. "Dual liquidity crises under alternative monetary frameworks," VfS Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62032, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc12:62032
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    Cited by:

    1. Fagan, Gabriel & McNelis, Paul D., 2020. "Sudden stops in the Euro Area: Does monetary union matter?," Journal of International Money and Finance, Elsevier, vol. 108(C).
    2. Barry Eichengreen & Arnaud J. Mehl & Livia Chițu & Gary Richardson, 2014. "Mutual Assistance between Federal Reserve Banks, 1913-1960 as Prolegomena to the TARGET2 Debate," NBER Working Papers 20267, National Bureau of Economic Research, Inc.
    3. Bindseil, Ulrich & Jabłecki, Juliusz, 2013. "Central bank liquidity provision, risk-taking and economic efficiency," Working Paper Series 1542, European Central Bank.
    4. Rajmund MIRDALA, 2015. "Decomposing Euro Area Sovereign Debt Yields into Inflation Expectations and Expected Real Interest Rates," Journal of Advanced Research in Law and Economics, ASERS Publishing, vol. 6(4), pages 714-737.
    5. Gabriel Fagan & Paul McNelis, 2014. "TARGET Balances and Macroeconomic Adjustment to Sudden Stops in the Euro Area," The Institute for International Integration Studies Discussion Paper Series iiisdp465, IIIS, revised Dec 2014.
    6. Buiter, Willem H. & Rahbari, Ebrahim, 2012. "Target2 Redux: The simple accountancy and slightly more complex economics of Bundesbank loss exposure through the Eurosystem," CEPR Discussion Papers 9211, C.E.P.R. Discussion Papers.

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    More about this item

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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