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Central bank co-operation and international liquidity in the financial crisis of 2008-9

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  • William Allen
  • Richhild Moessner
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    Abstract

    The financial crisis that began in August 2007 has blurred the sharp distinction between monetary and financial stability. It has also led to a revival of practical central bank co-operation. This paper explains how things have changed. The main innovation in central bank cooperation during this crisis was the emergency provision of international liquidity through bilateral central bank swap facilities, which have evolved to form interconnected swap networks. We discuss the reasons for establishing swap facilities, relate the probability of a country receiving a swap line in a currency to a measure of currency-specific liquidity shortages based on the BIS international banking statistics, and find a significant relationship in the case of the US dollar, the euro, the yen and the Swiss franc. We also discuss the role and effectiveness of swap lines in relieving currency-specific liquidity shortages, the risks that central banks run in extending swap lines and the limitations to their utility in relieving liquidity pressures. We conclude that the credit crisis is likely to have a lasting effect on the international liquidity policies of governments and central banks.

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    Bibliographic Info

    Paper provided by Bank for International Settlements in its series BIS Working Papers with number 310.

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    Length: 91 pages
    Date of creation: Jun 2010
    Date of revision:
    Handle: RePEc:bis:biswps:310

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    Keywords: Central bank cooperation; central bank swap lines; FX swaps; international liquidity; lender of last resort;

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    Cited by:
    1. Moessner, Richhild & Allen, William A., 2013. "Central bank swap line effectiveness during the euro area sovereign debt crisis," Journal of International Money and Finance, Elsevier, Elsevier, vol. 35(C), pages 167-178.

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