Dollar shortages and central bank swap lines

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 10 July 2020

Staff Working Paper No. 879

Fernando Eguren-Martin

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.

PDFDollar shortages and central bank swap lines

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