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International reserves and swap lines: substitutes or complements?

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  • Aizenman, Joshua
  • Jinjarak, Yothin
  • Park, Donghyun

Abstract

Developing Asia experienced a sharp surge in foreign currency reserves prior to the 2008-9 crisis.The global crisis has been associated with an unprecedented rise of swap agreements betweencentral banks of larger economies and their counterparts in smaller economies. We explorewhether such swap lines can reduce the need for reserve accumulation. The evidence suggeststhat there is only a limited scope for swaps to substitute for reserves. The selectivity of the swaplines indicates that only countries with significant trade and financial linkages can expect accessto such ad hoc arrangements, on a case by case basis. Moral hazard concerns suggest that theapplicability of these arrangements will remain limited. However, deepening swap agreementsand regional reserve pooling arrangements may weaken the precautionary motive for reserveaccumulation.

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt04v2q5s7.

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Date of creation: 07 Mar 2010
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Handle: RePEc:cdl:ucscec:qt04v2q5s7

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Keywords: Social and Behavioral Sciences; Reserves; swaps; dollar standard; Asia; trade and financial linkages;

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  1. Joshua Aizenman, 2009. "Hoarding International Reserves Versus a Pigovian Tax-Cum-Subsidy Scheme: Reflections on the Deleveraging Crisis of 2008-9, and a Cost Benefit Analysis," NBER Working Papers, National Bureau of Economic Research, Inc 15484, National Bureau of Economic Research, Inc.
  2. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(2), pages 379-408, May.
  3. Joshua Aizenman & Jaewoo Lee, 2005. "International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence," NBER Working Papers, National Bureau of Economic Research, Inc 11366, National Bureau of Economic Research, Inc.
  4. Love, Inessa & Preve, Lorenzo A. & Sarria-Allende, Virginia, 2007. "Trade credit and bank credit: Evidence from recent financial crises," Journal of Financial Economics, Elsevier, Elsevier, vol. 83(2), pages 453-469, February.
  5. Obstfeld, Maurice & Shambaugh, Jay C & Taylor, Alan M, 2008. "Financial Stability, the Trilemma, and International Reserves," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6693, C.E.P.R. Discussion Papers.
  6. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2009. "Financial Instability, Reserves, and Central Bank Swap Lines in the Panic of 2008," American Economic Review, American Economic Association, American Economic Association, vol. 99(2), pages 480-86, May.
  7. Michael P. Dooley & David Folkerts-Landau & Peter M. Garber, 2009. "Bretton Woods II Still Defines the International Monetary System," NBER Working Papers, National Bureau of Economic Research, Inc 14731, National Bureau of Economic Research, Inc.
  8. Andrew K. Rose & Mark M. Spiegel, 2002. "A gravity model of sovereign lending: trade, default and credit," Working Paper Series, Federal Reserve Bank of San Francisco 2002-09, Federal Reserve Bank of San Francisco.
  9. Yothin Jinjarak, 2007. "On the Causality between Trade Credits and Imports: Evidence and Possible Implication for Trade Penalties on Debt Defaults," International Economic Journal, Taylor & Francis Journals, Taylor & Francis Journals, vol. 21(3), pages 317-333.
  10. Aizenman, Joshua & Pasricha, Gurnain Kaur, 2010. "Selective swap arrangements and the global financial crisis: Analysis and interpretation," International Review of Economics & Finance, Elsevier, Elsevier, vol. 19(3), pages 353-365, June.
  11. Yin-Wong Cheung & Xingwang Qian, 2007. "Hoarding of International Reserves: Mrs Machlup’s Wardrobe and the Joneses," CESifo Working Paper Series, CESifo Group Munich 2065, CESifo Group Munich.
  12. Aizenman, Joshua & Chinn, Menzie D. & Ito, Hiro, 2010. "The emerging global financial architecture: Tracing and evaluating new patterns of the trilemma configuration," Journal of International Money and Finance, Elsevier, Elsevier, vol. 29(4), pages 615-641, June.
  13. Park, Donghyun & Estrada, Gemma, 2009. "Are Developing Asia’s Foreign Exchange Reserves Excessive? An Empirical Examination," ADB Economics Working Paper Series, Asian Development Bank 170, Asian Development Bank.
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