Dollar Shortages and Central Bank Swap Lines

36 Pages Posted: 21 Jul 2020

Date Written: July 10, 2020

Abstract

We explore the role of ‘dollar shortage’ shocks and central bank swap lines in a two-country New Keynesian model with financial frictions. Domestic banks issue both domestic and foreign currency debt and lend in domestic currency. Foreign currency-specific funding shocks, which are amplified via their effect on the exchange rate given balance sheet mismatches, lead to uncovered interest rate parity deviations, a contraction in lending and have a significant negative effect on macroeconomic variables. We show that central bank swap lines can attenuate these dynamics provided they are large enough.

Keywords: Central bank swap lines, liquidity facilities, dollar shortages, uncovered interest rate parity condition, financial frictions

JEL Classification: E32, E44, E58, F33, F41, G15

Suggested Citation

Eguren Martin, Fernando, Dollar Shortages and Central Bank Swap Lines (July 10, 2020). Bank of England Working Paper No. 879, Available at SSRN: https://ssrn.com/abstract=3654322 or http://dx.doi.org/10.2139/ssrn.3654322

Fernando Eguren Martin (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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