INTERNATIONAL LIQUIDITY, NEGATIVE INTEREST RATE POLICY AND BANKING SUPERVISION: EVIDENCE FROM A NATURAL EXPERIMENT

Chapter 2: Given the importance Swap lines played during the coronavirus-induced crisis, this paper analyses the impact of temporary U.S. dollar liquidity arrangements (swap lines) on international reserves (IR). Specifically, I investigate the effect that the Federal Reserve (FED) swap lines have had on the accumulation of IR of those countries involved compared to those countries that do not have any type of liquidity arrangements with the FED. By analysing a sample of 47 countries over the period 2002-2018 and a difference-in-differences methodology, I find that, overall, there is no difference in the accumulation process of IR between those countries that were involved in the global financial crisis (GFC) swap lines and those that were not. However, on close inspection, by analysing the emerging market economies (EME) sub-sample, I find empirical evidences that these countries - involved in swap lines by FED, when these GFC arrangements expired - started to accumulate reserves to a greater extent to the other considered EME. Furthermore, when I investigate whether these divergences are due to ultra-easy monetary policies or turbulence periods, I find this greater accumulation to be a phenomenon clearly wanted by the countries involved. This result suggests that swap lines involved countries that do not believe in the benevolence of Fed operations, and being more exposed to dollar shocks than other EME, they need a higher stockpile of IR. My contribution could suggest that EME will continue to follow their precautionary patterns, also after the last coronavirus swap lines.