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Liquidity Crises, Liquidity Lines and Sovereign Risk

Yasin Onder ()

Working Papers from Research and Monetary Policy Department, Central Bank of the Republic of Turkey

Abstract: This paper delivers a framework to quantitatively investigate the introduction of liquidity lines during a liquidity crisis. In an endogenous sovereign default model, I quantify the gains of arranging such lines by comparing simulations of the model with the simulations found when the government issues only non-state contingent bonds. I find that liquidity lines mitigate the borrowing costs and generate gains both for the government and its creditors. I also show that when the liquidity lines are introduced and the sovereign is committed not to exceed its mean debt-to-income ratio prior to liquidity lines being established, then the gains are significantly larger. These findings shed light on the current policy discussions for the utilization of liquidity lines.

Keywords: Sovereign default; Liquidity shocks; Swap lines; Global safety nets; FCL; PLL (search for similar items in EconPapers)
JEL-codes: F30 F34 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-cmp and nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:tcb:wpaper:1536

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