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Dollar illiquidity and central bank swap arrangements during the global financial crisis

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Listed:
  • Andrew K. Rose
  • Mark M. Spiegel

Abstract

While the global financial crisis was centered in the United States, it led to a surprising appreciation in the dollar, suggesting global dollar illiquidity. In response, the Federal Reserve partnered with other central banks to inject dollars into the international financial system. Empirical studies of the success of these efforts have yielded mixed results, in part because their timing is likely to be endogenous. In this paper, we examine the cross-sectional impact of these interventions. Theory consistent with dollar appreciation in the crisis suggests that their impact should be greater for countries that have greater exposure to the United States through trade and financial channels, less transparent holdings of dollar assets, and greater illiquidity difficulties. We examine these predictions for observed cross-sectional changes in CDS spreads, using a new proxy for innovations in perceived changes in sovereign risk based upon Google-search data. We find robust evidence that auctions of dollar assets by foreign central banks disproportionately benefited countries that were more exposed to the United States through either trade linkages or asset exposure. We obtain weaker results for differences in asset transparency or illiquidity. However, several of the important announcements concerning the international swap programs disproportionately benefited countries exhibiting greater asset opaqueness.

Suggested Citation

  • Andrew K. Rose & Mark M. Spiegel, 2011. "Dollar illiquidity and central bank swap arrangements during the global financial crisis," Working Paper Series 2011-18, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfwp:2011-18
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    References listed on IDEAS

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    Cited by:

    1. Acharya, Viral V. & Fleming, Michael J. & Hrung, Warren B. & Sarkar, Asani, 2017. "Dealer financial conditions and lender-of-last-resort facilities," Journal of Financial Economics, Elsevier, vol. 123(1), pages 81-107.
    2. Saleem Bahaj & Ricardo Reis, 2018. "Central Bank Swap Lines," CESifo Working Paper Series 7124, CESifo Group Munich.
    3. Saleem Bahaj & Ricardo Reis, 2018. "Central Bank Swap Lines," Discussion Papers 1816, Centre for Macroeconomics (CFM).
    4. Kalin I Tintchev, 2013. "Connected to Whom? International Interbank Borrowing During the Global Crisis," IMF Working Papers 13/14, International Monetary Fund.
    5. repec:elg:eechap:16612_20 is not listed on IDEAS
    6. Alberola, Enrique & Erce, Aitor & Serena, José Maria, 2016. "International reserves and gross capital flows dynamics," Journal of International Money and Finance, Elsevier, vol. 60(C), pages 151-171.
    7. repec:nbb:ecrart:y:2017:m:september:i:ii:p:87-112 is not listed on IDEAS
    8. Hale, Galina & Jones, Peter & Spiegel, Mark M., 2014. "Home currency issuance in global debt markets," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    9. Forbes, Kristin J., 2011. "Global imbalances and global liquidity - commentary," Proceedings, Federal Reserve Bank of San Francisco, issue Nov, pages 345-345.
    10. repec:wsi:gjexxx:v:01:y:2012:i:01:n:s2251361212500024 is not listed on IDEAS
    11. Claudio Borio & Anna Zabai, 2018. "Unconventional monetary policies: a re-appraisal," Chapters,in: Research Handbook on Central Banking, chapter 20, pages 398-444 Edward Elgar Publishing.

    More about this item

    Keywords

    Global financial crisis ; Liquidity (Economics) ; Dollar;

    JEL classification:

    • 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
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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