Lenders of Last Resort in a Globalized World

33 Pages Posted: 26 Aug 2009

See all articles by Maurice Obstfeld

Maurice Obstfeld

University of California, Berkeley - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: July 2009

Abstract

The recent financial crisis teaches important lessons regarding the lender-of-last resort function. Large swap lines extended in 2007-08 from the Federal Reserve to other central banks show that the classic concept of a national last-resort lender fails to address key vulnerabilities in a globalized financial system with multiple currencies. What system of emergency international financial support will best help to minimize the likelihood of future economic instability? Acting alongside national central banks, the International Monetary Fund has a key role to play in the constellation of lenders of last resort. As the income-level and institutional divergence between emerging and mature economies shrinks over time, the IMF may even evolve into a global last-resort lender that channels central bank liquidity where it is needed. The IMF’s effectiveness would be greatly enhanced by several complementary reforms in international financial governance, though some of these appear politically problematic at the present time.

Keywords: central banking, financial crisis, International Monetary Fund, international monetary system, Lender of last resort

JEL Classification: E58, F33, F36

Suggested Citation

Obstfeld, Maurice, Lenders of Last Resort in a Globalized World (July 2009). CEPR Discussion Paper No. DP7355. Available at SSRN: https://ssrn.com/abstract=1461984

Maurice Obstfeld (Contact Author)

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-643-9646 (Phone)
510-642-6615 (Fax)

HOME PAGE: http://emlab.berkeley.edu/users/obstfeld/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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