Central Bank Swap Lines and CIP Deviations

17 Pages Posted: 20 Aug 2017

See all articles by William A. Allen

William A. Allen

National Institute of Economic and Social Research

Gabriele Galati

De Nederlandsche Bank

Richhild Moessner

Bank for International Settlements (BIS)

William Nelson

The Clearing House

Date Written: August 14, 2017

Abstract

We study the use of US 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 US money markets during times of financial crisis, and less to tensions which 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 (CIP) 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 US 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.

Keywords: Central Bank Swap Lines, Foreign Exchange Swaps, Covered Interest Parity, Financial Crisis

JEL Classification: E52, E58, F31

Suggested Citation

Allen, William A. and Galati, Gabriele and Moessner, Richhild and Nelson, William, Central Bank Swap Lines and CIP Deviations (August 14, 2017). De Nederlandsche Bank Working Paper No. 566. Available at SSRN: https://ssrn.com/abstract=3020747 or http://dx.doi.org/10.2139/ssrn.3020747

William A. Allen

National Institute of Economic and Social Research ( email )

2, Dean Trench Street
London, SW1P 3HE
United Kingdom

Gabriele Galati (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Richhild Moessner

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

William Nelson

The Clearing House ( email )

1001 Pennsylvania Ave
Washington, DC
United States

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