Central Bank Involvement in Banking Crises in Latin America

51 Pages Posted: 1 Jul 2008

See all articles by Luis I Jácome

Luis I Jácome

International Monetary Fund (IMF)

Date Written: May 2008

Abstract

This paper reviews the nature of central bank involvement in 26 episodes of financial disturbance and crises in Latin America from the mid-1990s onwards. It finds that, except in a handful of cases, large amounts of central bank money were used to cope with large and small crises alike. Pouring central bank money into the financial system generally derailed monetary policy, fueled further macroeconomic unrest, and contributed to simultaneous currency crises, thereby aggravating financial instability. In contrast, when central bank money issuance was restricted and bank resolution was timely executed, financial disturbances were handled with less economic cost. However, this strategy worked provided appropriate institutional arrangements were in place, which highlights the importance of building a suitable framework for preventing and managing banking crises.

Keywords: Working Paper, South America, Latin America, Central America, Central banks, Financial crisis, Banking crisis

Suggested Citation

Jácome, Luis I, Central Bank Involvement in Banking Crises in Latin America (May 2008). IMF Working Paper No. 08/135, Available at SSRN: https://ssrn.com/abstract=1153751

Luis I Jácome (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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