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International reserves and swap lines: substitutes or complements?

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  • Aizenman, Joshua
  • Jinjarak, Yothin
  • PARK, Donghyun Dr.

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 between central banks of larger economies and their counterparts in smaller economies. We explore whether such swap lines can reduce the need for reserve accumulation. The evidence suggests that there is only a limited scope for swaps to substitute for reserves. The selectivity of the swap lines indicates that only countries with significant trade and financial linkages can expect access to such ad hoc arrangements, on a case by case basis. Moral hazard concerns suggest that the applicability of these arrangements will remain limited. However, deepening swap agreements and regional reserve pooling arrangements may weaken the precautionary motive for reserve accumulation.

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Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt81b751sh.

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Date of creation: 01 Mar 2010
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Handle: RePEc:cdl:ucscec:qt81b751sh

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

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  1. 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.
  2. 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.
  3. 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.
  4. Joshua Aizenman & Jaewoo Lee, 2007. "International Reserves: Precautionary Versus Mercantilist Views, Theory and Evidence," Open Economies Review, Springer, Springer, vol. 18(2), pages 191-214, April.
  5. 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.
  6. 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.
  7. 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.
  8. Michael Dooley & David Folkerts-Landau & Peter Garber, 2009. "Bretton Woods Ii Still Defines The International Monetary System," Pacific Economic Review, Wiley Blackwell, Wiley Blackwell, vol. 14(3), pages 297-311, 08.
  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. 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.
  11. 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.
  12. Yin-Wong Cheung & Xingwang Qian, 2009. "Hoarding of International Reserves: Mrs Machlup's Wardrobe and the Joneses," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 17(4), pages 824-843, 09.
  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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