A quantitative model of international lending of last resort

Pedro Gete and Givi Melkadze

Journal of International Economics, 2020, vol. 123, issue C

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 (search for similar items in EconPapers)
JEL-codes: E4 E5 F3 G2 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:123:y:2020:i:c:s002219962030009x

DOI: 10.1016/j.jinteco.2020.103290

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