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Central bank swap lines and CIP deviations

William Allen (), Gabriele Galati (), Richhild Moessner and William Nelson

International Journal of Finance & Economics, 2017, vol. 22, issue 4, 394-402

Abstract: We study the use of U.S. 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 U.S. money markets during times of financial crisis, and less to tensions that 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 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 U.S. 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.

Date: 2017
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https://doi.org/10.1002/ijfe.1596

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International Journal of Finance & Economics is currently edited by Mark P. Taylor, Keith Cuthbertson and Michael P. Dooley

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