Monetary Policy Challenges in Emerging Markets: Sudden Stop, Liability Dollarization, and Lender of Last Resort

Monetary Policy Challenges in Emerging Markets: Sudden Stop, Liability Dollarization, and Lender of Last Resort

Lender of Last Resort :

It has become commonplace in the current crisis to refer to the Federal Reserve as the economy’s lender of last resort (LLR). Typical is the observation of Glenn Hubbard, Hal Scott, and John Thornton (2009) that “Over many decades and especially in this financial crisis, the Fed has used its balance sheet to be a classical lender of last resort.” With all due respect to these authors and numero...

Optimal Monetary Policy in a ‘Sudden Stop’

During the Asian financial crises, interest rates were raised immediately, and then reduced sharply. We describe an environment in which this is the optimal monetary policy. ∗Northwestern University and Tilburg University. †Northwestern University, and NBER. ‡International Monetary Fund. §Braggion thanks the European Central Bank-Research Department for its hospitality. Christiano is grateful f...

Micro-aspects of Monetary Policy: Lender of Last Resort and Selection of Banks in Pre-war Japan

Discussion Papers are a series of manuscripts in their draft form. They are not intended for circulation or distribution except as indicated by the author. For that reason Discussion Papers may not be reproduced or distributed without the written consent of the author. Abstract This paper explores how the Bank of Japan (BOJ) dealt with the trade-off between stability of the financial system and...

Monetary Stability and Liquidity Crises: The Role of the Lender of Last Resort

We evaluate the desirability of having an elastic currency generated by a lender of last resort that prints money and lends it to banks in distress. When banks cannot borrow, the economy has a unique equilibrium that is not Pareto optimal. The introduction of unlimited borrowing at a zero nominal interest rate generates a steady state equilibrium that is Pareto optimal. However, this policy is ...