Central Bank Involvement in Banking Crises in Latin America
IMF Working Papers, May 1, 2008
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- Central Bank Involvement in Banking Crises in Latin America
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Bibliographic details
- Authors: Luis Ignacio Jácome
- Published: May 1, 2008
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451869941.001
Summary and key findings
- Reviews the nature of central bank involvement in 26 episodes of financial disturbance and crises in Latin America from the mid-1990s onwards.
- Finds that, except in a handful of cases, large amounts of central bank money were used to cope with large and small crises alike.
- States that pouring central bank money into the financial system generally:
- derailed monetary policy,
- fueled further macroeconomic unrest,
- contributed to simultaneous currency crises,
- thereby aggravating financial instability.
- Contrasts these outcomes with episodes where central bank money issuance was restricted and bank resolution was timely executed:
- financial disturbances were handled with less economic cost.
- this strategy worked provided appropriate institutional arrangements were in place.
- Emphasizes the importance of building a suitable framework for preventing and managing banking crises.
Policy implications and recommendations
- Limit central bank money issuance during banking disturbances to avoid derailing monetary policy.
- Prioritize timely bank resolution to reduce economic costs of financial disturbances.
- Establish appropriate institutional arrangements to enable restricted monetary issuance and effective bank resolution.
- Recognize that large liquidity injections can exacerbate macroeconomic unrest and trigger simultaneous currency crises.
Content in this bundle
- _wp08135 — Banking Crises and Monetary Policy