Dual Liquidity Crises - A Financial Accounts Framework

13 Pages Posted: 24 Jan 2013

See all articles by Ulrich Bindseil

Ulrich Bindseil

European Central Bank (ECB)

Adalbert Winkler

Frankfurt School of Finance & Management gemeinnützige GmbH

Date Written: February 2013

Abstract

This paper analyzes dual liquidity crises, i.e. funding crises which encompass the private and the public sector, and the shock absorbing capacity of central banks within a closed system of financial accounts. We find that a central bank that operates under a flexible exchange rate is most effective in containing a dual liquidity crisis. A central bank of a euro area type monetary union has a similar capacity as long as the integrity of the union is beyond doubt. By contrast, within any fixed exchange rate system the availability of inter‐central bank credit determines the elasticity of a central bank in providing liquidity. Finally, domestic constraints, i.e. collateral rules, risk taking ability or legal prohibitions, can limit the elasticity of the central bank's response to liquidity shocks.

Suggested Citation

Bindseil, Ulrich and Winkler, Adalbert, Dual Liquidity Crises - A Financial Accounts Framework (February 2013). Review of International Economics, Vol. 21, Issue 1, pp. 151-163, 2013, Available at SSRN: https://ssrn.com/abstract=2206172 or http://dx.doi.org/10.1111/roie.12026

Ulrich Bindseil (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Adalbert Winkler

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

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