This paper develops a simple model of an international lender of last resort (ILOLR). The world economy consists of many open economies, each with a banking system and a central bank operating under a pegged exchange rate regime. The fragility of the banking system and the limited ability of a...

This paper develops a model of the lender of last resort. It provides an analytical basis for “too big too fail” and a rationale for “constructive ambiguity”. Key results are that if contagion (moral hazard) is the main concern, the Central Bank (CB) will have an excessive (little)...

This paper develops a model of the lender of last resort. It provides an analytical basis for too big too fail and a rationale for constructive ambiguity. Key results are that if contagion (moral hazard) is the main concern, the Central Bank (CB) will have an excessive (little) incentive to...

This paper develops a simple model of an international lender of last resort (ILOLR). The world economy consists of many open economies, each with its own banking system and its own central bank which uses its reserves to manage a pegged exchange rate. The fragility of the banking system and the...

This paper develops a model of the lender of last resort (LOLR). In a simple one-period setting, the Central Bank (CB) should only rescue banks which are above a threshold size, thus providing an analytical basis for "too big too fail". We also provide a rationale for "constructive ambiguity"....