A Quantitative Model of International Lending of Last Resort

47 Pages Posted: 18 Jul 2016 Last revised: 10 Jan 2020

See all articles by Pedro Gete

Pedro Gete

IE Business School; IE University

Givi Melkadze

Georgia State University - Department of Economics

Date Written: December 2019

Abstract

We analyze banking crises and lending of last resort (LOLR) in a quantitative model of financial frictions with bank defaults. LOLR policies generate a tradeoff between financial fragility (due to more highly leveraged banks) and milder crises since the policies are effective once in a crisis. In the calibrated model, the crisis mitigation effect dominates the moral hazard problem and the economy is better off having access to a lender of last resort. We characterize the conditions under which pools of small economies can be sustainable LOLRs. In addition, we assess the ability of China - a country with ample reserves - to be a sustainable international LOLR.

Keywords: Banking Crises, China, Financial Frictions, Lender of Last Resort

JEL Classification: E4, E5, F3, G2

Suggested Citation

Gete, Pedro and Melkadze, Givi, A Quantitative Model of International Lending of Last Resort (December 2019). Journal of International Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2810282 or http://dx.doi.org/10.2139/ssrn.2810282

Pedro Gete (Contact Author)

IE Business School

Calle Maria de Molina 12, Bajo
Madrid, Madrid 28006
Spain

IE University ( email )

Calle Pedro de Valdivia 21
Madrid, Madrid 28006
Spain

Givi Melkadze

Georgia State University - Department of Economics ( email )

P.O. Box 3992
Atlanta, GA 30302-3992
United States

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