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Central Banks as Dollar Lenders of Last Resort: Implications for Regulation and Reserve Holdings

Author

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  • Mitali Das
  • Gita Gopinath
  • Helene Hall
  • Taehoon Kim
  • Jeremy C. Stein

Abstract

We explore how foreign central banks behave when firms engage in currency mismatch, borrowing heavily in dollars. A central bank can deal with risky private-sector mismatch in two ways: (i) with financial regulation or (ii) by accumulating reserves to better serve as a dollar lender of last resort. We highlight a novel externality:Individual central banks may over accumulate dollar reserves, as this exacerbates a global scarcity of dollar-denominated assets, lowering dollar interest rates and encouraging firms to further increase their currency mismatch. Relative to the decentralized outcome, a global planner may prefer tighter financial regulation and reduced holdings of dollar reserves.

Suggested Citation

  • Mitali Das & Gita Gopinath & Helene Hall & Taehoon Kim & Jeremy C. Stein, 2026. "Central Banks as Dollar Lenders of Last Resort: Implications for Regulation and Reserve Holdings," American Economic Journal: Macroeconomics, American Economic Association, vol. 18(3), pages 1-41, July.
    • Handle: RePEc:aea:aejmac:v:18:y:2026:i:3:p:1-41
    DOI: 10.1257/mac.20240107
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    References listed on IDEAS

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    1. Linda S. Goldberg & Oliver Zain Hannaoui, 2024. "Drivers of Dollar Share in Foreign Exchange Reserves," Staff Reports 1087, Federal Reserve Bank of New York.
    2. Mr. Serkan Arslanalp & Mr. Barry J. Eichengreen & Chima Simpson-Bell, 2022. "The Stealth Erosion of Dollar Dominance: Active Diversifiers and the Rise of Nontraditional Reserve Currencies," IMF Working Papers 2022/058, International Monetary Fund.
    3. Arslanalp, Serkan & Eichengreen, Barry & Simpson-Bell, Chima, 2022. "The stealth erosion of dollar dominance and the rise of nontraditional reserve currencies," Journal of International Economics, Elsevier, vol. 138(C).
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    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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