DP2842 | The International Lender of Last Resort: How Large is Large Enough?

Publication Date

06/07/2001

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Abstract

This Paper considers how an international lender of last resort can prevent self-fulfilling banking and currency crises in emerging economies. We compare two different arrangements: one in which the international lender of last resort injects international liquidity into financial markets, and one in which its resources are used to back domestic banking safety nets. We argue that these arrangements have very different institutional implications: the first one implies an international lender of last resort with unlimited resources (a global central bank), while the second one could be operated by a limited ?international banking fund?. This fund, however, would have to be closely involved in the supervision of domestic banking systems. Both arrangements would require important changes in the global financial architecture.