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Central Bank co-operation and International liquidity in the financial crisis of 2008-09

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  • William A. Allen

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  • Richhild Moessner

    ()

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    Abstract

    The advent of the financial crisis in August 2007, and its subsequent intensification, has largely eroded the hitherto apparently sharp distinction between monetary and financial stability, and it has led to a revival of central bank co-operation. The purpose of this paper is to describe and explain how things have changed, focussing on the main innovation in central bank cooperation during this crisis, namely 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.

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    File URL: http://www.lse.ac.uk/fmg/workingPapers/specialPapers/PDF/SP187.pdf
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    Bibliographic Info

    Paper provided by Financial Markets Group in its series FMG Special Papers with number sp187.

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    Date of creation: Feb 2010
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    Handle: RePEc:fmg:fmgsps:sp187

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    Web page: http://www.lse.ac.uk/fmg/

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    1. Toniolo,Gianni Assisted by-Name:Clement,Piet, 2007. "Central Bank Cooperation at the Bank for International Settlements, 1930–1973," Cambridge Books, Cambridge University Press, number 9780521043700, November.
    2. David G. Hartman, 1984. "The International Financial Market and U.S. Interest Rates," NBER Working Papers 0598, National Bureau of Economic Research, Inc.
    3. Baba, Naohiko & Packer, Frank, 2009. "From turmoil to crisis: Dislocations in the FX swap market before and after the failure of Lehman Brothers," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1350-1374, December.
    4. Joshua Aizenman & Gurnain Kaur Pasricha, 2009. "Selective Swap Arrangements and the Global Financial Crisis: Analysis and Interpretation," NBER Working Papers 14821, National Bureau of Economic Research, Inc.
    5. Naohiko Baba & Frank Packer, 2009. "From turmoil to crisis: dislocations in the FX swap market before and after the failure of Lehman Brothers," BIS Working Papers 285, Bank for International Settlements.
    6. Patrick McGuire & Goetz von Peter, 2009. "The US dollar shortage in global banking," BIS Quarterly Review, Bank for International Settlements, March.
    7. Hartman, David G., 1984. "The international financial market and US interest rates," Journal of International Money and Finance, Elsevier, vol. 3(1), pages 91-103, April.
    8. Alejandro Jara & Ramon Moreno & Camilo E Tovar, 2009. "The global crisis and Latin America: financial impact and policy responses," BIS Quarterly Review, Bank for International Settlements, June.
    9. Claudio E. V. Borio & Gianni Toniolo, 2006. "One hundred and thirty years of central bank cooperation: a BIS perspective," BIS Working Papers 197, Bank for International Settlements.
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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, vol. 35(C), pages 167-178.

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