We thank Ursula Bachmann, Marco Corsi, Juliusz Jablecki, Francesco Papadia, Aurel Schubert, Flemming Würtz, the participants of the 2012 annual meeting of the “Ausschuss für Geldtheorie and Geldpolitik of the Verein für Socialpolitik”, the 2012 annual meeting of the “Verein für Socialpolitik” and the “DIW Berlin, University of Leipzig” conference on “Intra-European Imbalances, Global Imbalances, International Banking, and International Financial Stability”, September 2012 and two anonymous referees for useful comments.
Special issue: Four Generations of Global Imbalances. Guest Editors: Gunther Schnabl and Ansgar Belke
Dual Liquidity Crises—A Financial Accounts Framework
Article first published online: 23 JAN 2013
© 2013 Blackwell Publishing Ltd
Review of International Economics
Special Issue: Four Generations of Global Imbalances. Guest Editors: Gunther Schnabl and Ansgar Belke
Volume 21, Issue 1, pages 151–163, February 2013
How to Cite
Bindseil, U. and Winkler, A. (2013), Dual Liquidity Crises—A Financial Accounts Framework. Review of International Economics, 21: 151–163. doi: 10.1111/roie.12026
- Issue published online: 23 JAN 2013
- Article first published online: 23 JAN 2013
This paper analyzes dual liquidity crises, i.e. funding crises which encompass the private and the public sector, and the shock absorbing capacity of central banks within a closed system of financial accounts. We find that a central bank that operates under a flexible exchange rate is most effective in containing a dual liquidity crisis. A central bank of a euro area type monetary union has a similar capacity as long as the integrity of the union is beyond doubt. By contrast, within any fixed exchange rate system the availability of inter-central bank credit determines the elasticity of a central bank in providing liquidity. Finally, domestic constraints, i.e. collateral rules, risk taking ability or legal prohibitions, can limit the elasticity of the central bank's response to liquidity shocks.