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A Quantitative Model of International Lending of Last Resort

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Date
2020-03
Authors
Melkadze, Givi
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Court
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Elsevier
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https://hdl.handle.net/20.500.14417/3306
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https://doi.org/10.1016/j.jinteco.2020.103290
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.
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Attribution-NonCommercial-NoDerivatives 4.0 International
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IE Business School
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Gete, P., & Melkadze, G. (2020). A quantitative model of international lending of last resort. Journal of International Economics, 123, 103290. https://doi.org/10.1016/j.jinteco.2020.103290
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