DP7355 Lenders of Last Resort in a Globalized World

Author(s): Maurice Obstfeld
Publication Date: July 2009
Keyword(s): central banking, financial crisis, International Monetary Fund, international monetary system, Lender of last resort
JEL(s): E58, F33, F36
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7355

The recent financial crisis teaches important lessons regarding the lender-of-last resort function. Large swap lines extended in 2007-08 from the Federal Reserve to other central banks show that the classic concept of a national last-resort lender fails to address key vulnerabilities in a globalized financial system with multiple currencies. What system of emergency international financial support will best help to minimize the likelihood of future economic instability? Acting alongside national central banks, the International Monetary Fund has a key role to play in the constellation of lenders of last resort. As the income-level and institutional divergence between emerging and mature economies shrinks over time, the IMF may even evolve into a global last-resort lender that channels central bank liquidity where it is needed. The IMF?s effectiveness would be greatly enhanced by several complementary reforms in international financial governance, though some of these appear politically problematic at the present time.