Saleem Bahaj, Ricardo Reis, 25 September 2018

Swap lines between advanced economy central banks are a new and important part of the global financial architecture. This column analyses their role, from the perspective of central banks, in the transmission of monetary policy, and in the macroeconomic effects of policy. Results show that swap lines serve as liquidity facilities, that they put a ceiling on deviations from covered interest parity, and that they incentivise cross-border gross capital flows. 

Claudio Borio, Robert McCauley, Patrick McGuire, Vladyslav Sushko, 28 September 2016

Covered interest parity is close to a physical law in international finance, yet it has been consistently violated since the Global Crisis. Violations since 2014, once banks had strengthened their balance sheets and regained easy access to funding, are especially puzzling. This column argues that the violation reflects a combination of foreign exchange hedging demand and tighter limits to arbitrage. Hedging demand has been boosted, in particular, by divergent monetary policies in an ultra-low interest rate environment, while tighter limits to arbitrage result from a stricter management of banks’ balance sheets.

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