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Financial instability, reserves, and central bank swap lines in the panic of 2008

Author: Maurice Obstfeld; Jay C Shambaugh; Alan M Taylor; National Bureau of Economic Research.
Publisher: Cambridge, Mass. : National Bureau of Economic Research, ©2009.
Series: Working paper series (National Bureau of Economic Research), no. 14826.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Database:WorldCat
Summary:
In this paper we connect the events of the last twelve months, "The Panic of 2008" as it has been called, to the demand for international reserves. In previous work, we have shown that international reserve demand can be rationalized by a central bank's desire to backstop the broad money supply to avert the possibility of an internal/external double drain (a bank run combined with capital flight). Thus, simply  Read more...
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Genre/Form: History
Additional Physical Format: Print version:
Obstfeld, Maurice.
Financial instability, reserves, and central bank swap lines in the panic of 2008.
Cambridge, Mass. : National Bureau of Economic Research, ©2009
(DLC) 2009285850
Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Maurice Obstfeld; Jay C Shambaugh; Alan M Taylor; National Bureau of Economic Research.
OCLC Number: 317116389
Notes: "March 2009."
Description: 1 online resource (21 pages) : illustrations, digital.
Series Title: Working paper series (National Bureau of Economic Research), no. 14826.
Responsibility: Maurice Obstfeld, Jay C. Shambaugh, Alan M. Taylor.

Abstract:

In this paper we connect the events of the last twelve months, "The Panic of 2008" as it has been called, to the demand for international reserves. In previous work, we have shown that international reserve demand can be rationalized by a central bank's desire to backstop the broad money supply to avert the possibility of an internal/external double drain (a bank run combined with capital flight). Thus, simply looking at trade or short-term debt as motivations for reserve holdings is insufficient; one must also consider the size of the banking system (M2). Here, we show that a country's reserve holdings just before the current crisis, relative to their predicted holdings based on these financial motives, can significantly predict exchange rate movements of both emerging and advanced countries in 2008. Countries with large war chests did not depreciate -- and some appreciated. Meanwhile, those who held insufficient reserves based on our metric were likely to depreciate. Current account balances and short-term debt levels are not statistically significant predictors of depreciation once reserve levels are taken into account. Our mode'₂s typically high predicted reserve levels provide important context for the unprecedented U.S. dollar swap lines recently provided to many countries by the Federal Reserve.

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