Working Paper: NBER ID: w15804
Authors: Joshua Aizenman; Yothin Jinjarak; Donghyun Park
Abstract: Developing Asia experienced a sharp surge in foreign currency reserves prior to the 2008-9 crisis. The global crisis has been associated with an unprecedented rise of swap agreements between central banks of larger economies and their counterparts in smaller economies. We explore whether such swap lines can reduce the need for reserve accumulation. The evidence suggests that there is only a limited scope for swaps to substitute for reserves. The selectivity of the swap lines indicates that only countries with significant trade and financial linkages can expect access to such ad hoc arrangements, on a case by case basis. Moral hazard concerns suggest that the applicability of these arrangements will remain limited. However, deepening swap agreements and regional reserve pooling arrangements may weaken the precautionary motive for reserve accumulation.
Keywords: International reserves; Swap lines; Precautionary reserves; Financial crisis; Developing Asia
JEL Codes: F15; F31; F32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| swap agreements (F33) | international reserves (F31) |
| swap lines (F33) | need for reserve accumulation (F32) |
| swap lines stabilize market concerns (E44) | reduce need for reserves (E58) |
| credibility of central banks (E58) | effectiveness of swap lines (F33) |
| countries with substantial reserves (Q37) | secure swap agreements (F33) |
| selective nature of swap lines (F33) | access limited to countries with strong governance (P26) |