International Lender of Last Resort: Some Thoughts for the 21st Century
9 Pages Posted: 8 Oct 2014
Date Written: September 2014
How should international liquidity be provided and by whom? Does the world need an international lender of last resort (ILLR)? These questions have been at the centre of debates over the international monetary system for many decades (see the seminal article by Fischer (1999)). They have taken on a new flavour and importance in the last few years, with the significant expansion of both private gross cross-border capital flows and international balance sheets. The financial crisis and subsequent turbulence have confronted emerging market economies (EMEs) with severe tensions and difficult trade-offs for policymakers.
The policy challenge, also, has changed. For a long time, only countries facing specific balance of payments difficulties were confronted with foreign currency shortages. The policy problem was to find the right mix between external financing and domestic adjustments. Conditionality, as defined and implemented by the IMF, was key in this context. While this framework is, of course, still valid, the problem has become broader. A novel priority is to avoid liquidity disruptions in the global financial system, where private financial institutions engage into cross-border maturity transformation, with flows denominated mainly in a few major currencies.
The aim of the paper is to revisit the issue in the context of modern capital markets with deep financial integration, strong macrofinancial linkages and the expansion of privately global liquidity.
Full publication: Re-Thinking the Lender of Last Resort
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