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The International Lender of Last Resort Between Scylla and Charybdis

Juan Flores Zendejas and Norbert Gaillard

No unige:152743, Working Papers from University of Geneva, Paul Bairoch Institute of Economic History

Abstract: This chapter provides a historical overview of the efforts for international cooperation in pursuit of financial stability. We argue that there are two fundamental threats likely to undermine the actions of an international lender of last resort (ILOLR): debtor moral hazard and creditor moral hazard. During the Pax Britannica years, the Bank of England and the Bank of France were de facto ILOLR and managed to contain both types of moral hazard. In the interwar years, the League of Nations developed new forms of last-resort loans but failed to prevent the Great Depression because of the lack of cooperation between top capital-exporting countries. Since its establishment in 1944, the International Monetary Fund (IMF) has granted various credit facilities conditioned on the recipient countries accepting macroeconomic stabilization. The financial globalization process that started in the 1980s has exacerbated creditor moral hazard. This issue, largely overlooked by the IMF, should be a major source of concern for policy makers.

Keywords: Moral hazard; Lender of last resort; Financial crises (search for similar items in EconPapers)
JEL-codes: B26 F33 F34 F53 N20 (search for similar items in EconPapers)
Pages: 26 p.
Date: 2021
New Economics Papers: this item is included in nep-cba, nep-his, nep-hpe and nep-mon
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