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Central bank swap lines

Bahaj, Saleem and Reis, Ricardo (2018) Central bank swap lines. CFM Discussion Paper Series (CFM-DP2018-16). Centre For Macroeconomics, London School of Economics and Political Science, London, UK.

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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.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.centreformacroeconomics.ac.uk/Home.aspx
Additional Information: © 2018 Centre for Macroeconomics
Divisions: Centre for Macroeconomics
Subjects: H Social Sciences > HB Economic Theory
JEL classification: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
F - International Economics > F3 - International Finance > F33 - International Monetary Arrangements and Institutions
G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets
Sets: Research centres and groups > Centre for Macroeconomics
Date Deposited: 05 Oct 2018 14:39
Last Modified: 20 Nov 2019 05:08
URI: http://eprints.lse.ac.uk/id/eprint/90374

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