A Cost Efficient International Lender of Last Resort

International Research Journal of Finance and Economics, No. 41, pp. 105-120, 2010

Posted: 6 Jan 2011  

Tobias Knedlik

Halle Institute for Economic Research (IWH)

Date Written: January 4, 2010

Abstract

The current reform of the International Monetary Fund’s (IMF) lending instruments has transformed the Fund towards an international lender of last resort (ILOLR). Current research discusses various general frameworks for installing an ILOLR. However, it remains unclear how the ILOLR should actually operate. This paper discusses six different options for the construction of an ILOLR that supports central banks during currency crises. The paper concludes that the most cost efficient version of the ILOLR would be direct intervention by the IMF using IMF resources, with the option of using additional reserves from central banks. The paper considers measures of cost efficiency, such as cost of borrowing, intervention, and sterilization and moral hazard problems.

Keywords: International Lender of Last Resort, International Monetary Fund, currency crises

JEL Classification: F02, F33

Suggested Citation

Knedlik, Tobias, A Cost Efficient International Lender of Last Resort (January 4, 2010). International Research Journal of Finance and Economics, No. 41, pp. 105-120, 2010. Available at SSRN: https://ssrn.com/abstract=1734741

Tobias Knedlik (Contact Author)

Halle Institute for Economic Research (IWH) ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

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