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Currency Swap Agreements and Financial Crises in Small Open Economies

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  • Akihiko Ikeda

    (Department of Economics, Kyoto University of Advanced Science)

Abstract

This paper studies the effects of an international currency swap agreement, or an exchange of hard currencies between countries, on the probability of financial crises. The analysis is based on a small open economy model with a financial constraint. A currency swap is described as a mutual provision of collateral goods between two countries. The results show that there are cases where a currency swap agreement can lower the probability of financial crises. Whether it can benefit both member countries depends on their difference in the size or probability of recessions, as well as the amount of collateral goods exchanged. Contracts of currency swaps should be designed in consideration of these factors.

Suggested Citation

  • Akihiko Ikeda, 2020. "Currency Swap Agreements and Financial Crises in Small Open Economies," KIER Working Papers 1033, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:1033
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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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