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Central Bank Swap Lines

Author

Listed:
  • Saleem Bahaj

    () (Bank of England
    Centre for Macroeconomics (CFM))

  • Ricardo Reis

    () (London School of Economics (LSE)
    Centre for Macroeconomics (CFM))

Abstract

Swap lines between advanced-economy central banks are a new important part of the global financial architecture. This paper analyses their monetary policy effects from three perspectives. First, from the perspective of the central banks, it shows that the swap line mimics discount-window credit from the source central bank to the recipient-country banks using the recipient central bank as the bearer of the credit risk. Second, from the perspective of the transmission of monetary policy, it shows that the swap-line rate puts a ceiling on deviations from covered interest parity, and finds evidence for it in the data. Third, from the perspective of the macroeconomic effects of policy, it shows that the swap line ex ante encourages inflows from recipient-country banks into assets denominated in the source-country’s currency by reducing the ex post funding risk. We find support for these predictions using difference-in-difference empirical strategies that exploit the fact that only some currencies saw changes in the terms of their dollar swap line, only some bonds in banks’ investments are exposed to dollar funding risk, only some dollar bonds are significantly traded by foreign banks, and only some banks have a significant U.S. presence.

Suggested Citation

  • Saleem Bahaj & Ricardo Reis, 2018. "Central Bank Swap Lines," Discussion Papers 1816, Centre for Macroeconomics (CFM).
  • Handle: RePEc:cfm:wpaper:1816
    as

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    File URL: http://www.centreformacroeconomics.ac.uk/Discussion-Papers/2018/CFMDP2018-16-Paper.pdf
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    References listed on IDEAS

    as
    1. Buch, Claudia M. & Bussierè, Matthieu & Goldberg, Linda & Hills, Robert, 2019. "The international transmission of monetary policy," Journal of International Money and Finance, Elsevier, vol. 91(C), pages 29-48.
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    3. Bräuning, Falk & Ivashina, Victoria, 2016. "Monetary policy and global banking," Working Papers 17-5, Federal Reserve Bank of Boston.
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    6. Rose, Andrew K. & Spiegel, Mark M., 2012. "Dollar illiquidity and central bank swap arrangements during the global financial crisis," Journal of International Economics, Elsevier, vol. 88(2), pages 326-340.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Highlights from the Fourth Bi-annual Global Research Forum on International Macroeconomics and Finance
      by Blog Author in Liberty Street Economics on 2019-01-11 12:00:00

    More about this item

    Keywords

    Liquidity facilities; Currency basis; Bond portfolio flows;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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