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Central bank swap lines: micro-level evidence

Author

Listed:
  • Ferrara, Gerardo

    (Bank of England)

  • Mueller, Philippe

    (Warwick Business School)

  • Viswanath-Natraj, Ganesh

    (Warwick Business School)

  • Wang, Junxuan

    (Warwick Business School)

Abstract

In this paper we investigate the price, volatility and micro-level effects of central bank swap lines during the 2020 pandemic. These policies lowered the ceiling on covered interest rate parity violations and reduced volatility following settlement of swap line auctions. We then combine dealer-level dollar repo auctions by the Bank of England with a trade repository that includes the universe of FX forward and swap contracts traded in the UK. We find evidence of a substitution channel: dealers that draw on swap lines reduce their demand for dollars at the forward leg in the FX market. We also find evidence that dealers that draw on swap lines increased their net supply of dollars to non-financial institutions, supporting the rationale for swap lines in providing cross-border liquidity to the real economy.

Suggested Citation

  • Ferrara, Gerardo & Mueller, Philippe & Viswanath-Natraj, Ganesh & Wang, Junxuan, 2022. "Central bank swap lines: micro-level evidence," Bank of England working papers 977, Bank of England.
    • Handle: RePEc:boe:boeewp:0977
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    References listed on IDEAS

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    Cited by:

    1. Ron Alquist & Karlye Dilts Stedman & R. Jay Kahn, 2022. "Foreign Reserve Management and U.S. Money Market Liquidity: A Cost of Exorbitant Privilege," Research Working Paper RWP 22-08, Federal Reserve Bank of Kansas City.

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    More about this item

    Keywords

    Swap lines; monetary policy; foreign exchange swaps; covered interest rate parity; central banking;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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