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Central bank swap lines and CIP deviations[Note *. *We would like to thank Christina Bräuning, Dion Reijnders, ...]
Author(s) -
Allen William A.,
Galati Gabriele,
Moessner Richhild,
Nelson William
Publication year - 2017
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.1596
Subject(s) - foreign exchange swap , swap (finance) , financial crisis , foreign exchange reserves , liberian dollar , financial system , central bank , economics , financial market , currency , foreign exchange market , interest rate parity , money market , sterilization (economics) , business , foreign exchange , monetary economics , monetary policy , finance , macroeconomics
We study the use of U.S. dollar central bank swap lines as a tool for addressing dislocations in the foreign currency swap market against the USD since the global financial crisis. We find that the use of the Federal Reserve's USD central bank swap lines was mainly related to tensions in U.S. money markets during times of financial crisis, and less to tensions that were confined to foreign exchange swap markets. In particular, we find that the use of USD central bank swap lines did not react significantly to the recent period of persistent deviations of covered interest parity since 2014. These results are consistent with the view that the Federal Reserve was guided by enlightened self‐interest when providing swap lines to foreign central banks, in order to reduce dislocations in U.S. financial markets and support financial stability. In recent years, foreign exchange swap markets have not functioned properly, but it appears that now that the crisis is over, the Federal Reserve and other central banks have decided against trying permanently to fill the gap left by the dysfunction in the commercial foreign exchange swap market.