Central bank swap arrangements in the COVID-19 crisis

Joshua Aizenman, Hiro Ito and Gurnain Pasricha

Journal of International Money and Finance, 2022, vol. 122, issue C

Abstract: Facing acute strains in the offshore dollar funding markets during the COVID-19 crisis, the Federal Reserve (Fed) provided US dollar liquidity to the global economy by reactivating or enhancing swap arrangements with other central banks and establishing a new repo facility for financial institutions and monetary authorities (FIMA). This paper assesses motivations for the Fed liquidity lines, and the effects and spillovers of US dollar auctions by central banks using these lines. We find that the access to the Fed liquidity arrangements was driven by the recipient economies’ close financial and trade ties with the US. Access to dollar liquidity also reflected global trade exposure. We find that announcements of expansion of Fed liquidity facilities or of auctions using these facilities led to appreciation of partner currencies against the US dollar and reduced these currencies’ deviations from covered interest parity (CIP). Dollar auctions by major central banks (BoE, ECB, BoJ and SNB) had spillovers: they led to temporary appreciation of other currencies against the US dollar, reduced CIP deviations, and persistently reduced sovereign bond yields of other economies. However, dollar auctions done by non-major central banks with access to Fed facilities did not have a meaningful impact on key domestic financial variables. The impact of major central bank auctions does not differ by the economies’ financial or trade links with the US or their balance sheet currency exposure, i.e. the major central bank auctions benefitted even the more vulnerable economies.

Keywords: Swap agreements; COVID-19 crisis (search for similar items in EconPapers)
JEL-codes: F15 F21 F32 F36 G15 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Working Paper: Central Bank Swap Arrangements in the COVID-19 Crisis (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:122:y:2022:i:c:s0261560621002060

DOI: 10.1016/j.jimonfin.2021.102555

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