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The International Lender of Last Resort

The International Lender of Last Resort

How Large Is Large Enough?

Chapter:
(p.89) 4 The International Lender of Last Resort
Source:
Managing Currency Crises in Emerging Markets
Author(s):
Olivier Jeanne, Charles Wyplosz
Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226155425.003.0006

This chapter examines whether an international lender of last resort (ILOLR) would be a useful addition to the international financial architecture. It analyzes whether an ILOLR can function effectively as a fund with limited and predetermined resources using a model of an emerging economy vulnerable to international liquidity crises. The findings reveal that required size of the ILOLR depends on how its resources are used by the domestic authorities. This chapter explains that if the LOLR backs a guarantee of the foreign currency liabilities of domestic banks, its resources do not need to be larger than the liquidity gap in the domestic banking sector.

Keywords:   ILOLR, international financial architecture, emerging economy, liquidity crises, domestic banks, liquidity gap

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