Should there be an international lender of last resort? Flashcards
1
Q
Should there be an international lender of last resort?
A
- Role of lender of last resort
o Domestic - CBs
o International - no institution to do so - Potential benefits of an international
LOLR -
o Stabilisation of Global Markets - inject liquidity into economies, preventing regional issues from spreading
o Avoidance of Currency Crisis - help countries defend their currencies from speculative attacks
o Reduced Dependence on National LOLRs - quicker and more consistent help from global LOLR - Challenges and Criticisms -
o Moral hazard - encourage risky behaviour as countries assume they’ll just be bailed out
o Governance and Sovereignty Issues - countries might resist giving up control on economic policy
o Funding and Resource Limitations - how funds are raised
o Unequal Influence and Fairness Concerns - smaller countries may worry that major economic powers would dominate decision-making - Current Alternatives and Their Limitations -
o IMF - limited resources and conditional loans
o Currency Swap Arrangements - swap lines often limited to certain countries
o Regional Financial Safety Nets - lack global reach and resources needed - Feasibility and Recommendations -
o Strengthen the IMF as LOLR - by increasing resources and reducing reliance on austerity measures
o Establish Clearer Swap Arrangements - could improve emergency liquidity support without need for new global institution
o Develop a Global Reserve Fund - enabled faster crisis responses
