Liquidity crises, liquidity lines and sovereign risk

Yasin Onder

Journal of Development Economics, 2022, vol. 154, issue C

Abstract: This paper investigates the trade-offs of introducing an extra line of credit in an emergency situation with a quantitative sovereign default model. I show that temporary access to these lines for up to 3 percent of mean annual income during low liquidity periods yields long-term effects with a lower cost of borrowing but with incentives to accumulate higher debt. Permanent access, however, has only short-lived effects because temporal arrangement better completes the markets and induces market discipline as the government worries about rollover risk once the low liquidity period ends. I also present in an event analysis that Mexico’s arrangement of swap lines with the Federal Reserve amid the global financial crisis in 2008 helped avoid a potential debt crisis.

Keywords: Sovereign default; Liquidity shocks; Swap lines; Sudden stops (search for similar items in EconPapers)
JEL-codes: F30 F34 (search for similar items in EconPapers)
Date: 2022
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Working Paper: Liquidity Crises, Liquidity Lines and Sovereign Risk (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:154:y:2022:i:c:s0304387821001334

DOI: 10.1016/j.jdeveco.2021.102772

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