Accessing U.S. Dollar Swap Lines: Macroeconomic Implications for a Small Open Economy

This paper proposes a framework to examine the macroeconomic impact of having U.S. dollar swap arrangements, where domestic and foreign currencies are valued and where agents also have access to domestic short and long-term bonds that have differential pledgeability. Within this environment, we investigate how U.S. dollar swap lines affect inflation and debt dynamics in the small open economy when domestic quantitative easing and standard interest rate management policies are also enacted. We show different combinations of U.S. dollar swap lines, and domestic quantitative easing as well as interest rate management policies can deliver the same steady state. We also find that such policies imply different short-run dynamics. Moreover, we find that traditional stabilization policies are not operative when agents do not consume the first best. When calibrated to Australia during the pandemic and under some conditions, we find that a more favorable swap line (agents in the small open economy can obtain U.S. dollar cheaper than in the forex market) would have allowed to cut back on long-term bond purchases from 35% to 24% of GDP. We also show that swaps and quantitative easing dampen the fiscal eigenvalue, changing the speed of adjustment towards the long run equilibria. Moreover, we find that the region of indeterminacy is enlarged when more liquid quantitative easing policies and more favorable swaps are pursued. Finally, we show that swap lines have a differential impact on domestic and foreign consumption.