Working Paper: NBER ID: w17359
Authors: Andrew K. Rose; Mark M. Spiegel
Abstract: While the global financial crisis was centered in the United States, it led to a surprising appreciation in the dollar, suggesting global dollar illiquidity. In response, the Federal Reserve partnered with other central banks to inject dollars into the international financial system. Empirical studies of the success of these efforts have yielded mixed results, in part because their timing is likely to be endogenous. In this paper, we examine the cross-sectional impact of these interventions. Theory consistent with dollar appreciation in the crisis suggests that their impact should be greater for countries that have greater exposure to the United States through trade and financial channels, less transparent holdings of dollar assets, and greater illiquidity difficulties. We examine these predictions for observed cross-sectional changes in CDS spreads, using a new proxy for innovations in perceived changes in sovereign risk based upon Google-search data. We find robust evidence that auctions of dollar assets by foreign central banks disproportionately benefited countries that were more exposed to the United States through either trade linkages or asset exposure. We obtain weaker results for differences in asset transparency or illiquidity. However, several of the important announcements concerning the international swap programs disproportionately benefited countries exhibiting greater asset opaqueness.
Keywords: dollar illiquidity; central bank swap arrangements; global financial crisis; credit default swaps; liquidity shortages
JEL Codes: E42; E58; F31; F33; F41; F42; G15; O24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| U.S. dollar auctions (D44) | CDS spreads (G12) |
| central bank interventions (E58) | CDS spreads (G12) |
| dollar liquidity (E41) | exchange rates (F31) |
| exposure to U.S. markets (G15) | impact of U.S. dollar auctions (F31) |
| opaque asset holdings (G19) | benefit from swap announcements (F33) |