Andrea Ferrero (University of Oxford, CEPR and CfM) - Dollar Shortages and Central Bank Swap Lines

Co-authors: Ambrogio Cesa-Bianchi (Bank of England, CEPR and CfM) and Fernando Eguren-Martin (SPX Capital and CfM)

We introduce shocks to the availability of US dollar funding for non-US financial intermediaries in a two-country New Keynesian model with financial frictions. Such dollar shortages lead to uncovered interest rate parity deviations and have a significant negative effects on the macroeconomy. Central bank swap lines can attenuate these effects, by loosening financial intermediaries’ borrowing constraints. We then devise a novel identification design for central bank swap lines shocks by exploiting high-frequency exchange rates movements in narrow windows around swap line announcements. A panel local projection exercise shows that the model’s predictions are borne out in the data.

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