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Dual liquidity crises under alternative monetary frameworks

  • Winkler, Adalbert
  • Bindseil, Ulrich

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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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century with number 62032.

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Date of creation: 2012
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Handle: RePEc:zbw:vfsc12:62032
Contact details of provider: Web page: http://www.socialpolitik.org/
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  1. Benjamin M. Friedman, 1990. "Implications of Corporate Indebtedness for Monetary Policy," NBER Working Papers 3266, National Bureau of Economic Research, Inc.
  2. Bindseil, Ulrich & Jabłecki, Juliusz, 2011. "A structural model of central bank operations and bank intermediation," Working Paper Series 1312, European Central Bank.
  3. Stijn Claessens & Neeltje van Horen, 2011. "Foreign Banks: Trends, Impact and Financial Stability," DNB Working Papers 330, Netherlands Central Bank, Research Department.
  4. Guillermo A. Calvo, 2006. "Monetary Policy Challenges in Emerging Markets: Sudden Stop, Liability Dollarization, and Lender of Last Resort," IDB Publications (Working Papers) 6841, Inter-American Development Bank.
  5. Guillermo A. Calvo, 2006. "Monetary Policy Challenges in Emerging Markets: Sudden Stop, Liability Dollarization, and Lender of Last Resort," NBER Working Papers 12788, National Bureau of Economic Research, Inc.
  6. Schnabel, Isabel, 2004. "The German Twin Crisis of 1931," The Journal of Economic History, Cambridge University Press, vol. 64(03), pages 822-871, September.
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  9. Winkler, Adalbert, 2011. "The joint production of confidence: lessons from nineteenth-century US commercial banks for twenty-first-century Euro area governments," Financial History Review, Cambridge University Press, vol. 18(03), pages 249-276, December.
  10. Charles Calomiris, 2009. "Banking Crises and the Rules of the Game," NBER Working Papers 15403, National Bureau of Economic Research, Inc.
  11. Sinn, Hans-Werner & Wollmershäuser, Timo, 2012. "Target loans, current account balances and capital flows: The ECB’s rescue facility," Munich Reprints in Economics 19556, University of Munich, Department of Economics.
  12. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises: A New Database," IMF Working Papers 08/224, International Monetary Fund.
  13. Andres Velasco & Roberto Chang, 2000. "Exchange-Rate Policy for Developing Countries," American Economic Review, American Economic Association, vol. 90(2), pages 71-75, May.
  14. Milton Friedman & Anna Jacobson Schwartz, 1965. "Why Was Monetary Policy So Inept?," NBER Chapters, in: The Great Contraction, 1929-33, pages 111-123 National Bureau of Economic Research, Inc.
  15. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
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