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Central Banks as Dollar Lenders of Last Resort: Implications for Regulation and Reserve Holdings / Mitali Das, Gita Gopinath, Taehoon Kim, Jeremy C. Stein.
- Format:
- Book
- Government document
- Author/Creator:
- Das, Mitali.
- Series:
- IMF Working Papers; Working Paper ; No. 2023/008
- IMF Working Papers
- Language:
- English
- Physical Description:
- 1 online resource (61 pages)
- Other Title:
- Central Banks as Dollar Lenders of Last Resort
- Place of Publication:
- Washington, D.C. : International Monetary Fund, 2023.
- Summary:
- This paper explores how non-U.S. central banks behave when firms in their economies engage in currency mismatch, borrowing more heavily in dollars than justified by their operating exposures. We begin by documenting that, in a panel of 53 countries, central bank holdings of dollar reserves are significantly correlated with the dollar-denominated bank borrowing of their non-financial corporate sectors, controlling for a number of known covariates of reserve accumulation. We then build a model in which the central bank can deal with private-sector mismatch, and the associated risk of a domestic financial crisis, in two ways: (i) by imposing ex ante financial regulations such as bank capital requirements; or (ii) by building a stockpile of dollar reserves that allow it to serve as an ex post dollar lender of last resort. The model highlights a novel externality: individual central banks may tend to over-accumulate dollar reserves, relative to what a global planner would choose. This is because individual central banks do not internalize that their hoarding of reserves exacerbates a global scarcity of dollar-denominated safe assets, which lowers dollar interest rates and encourages firms to increase the currency mismatch of their liabilities. Relative to the decentralized outcome, a global planner may prefer stricter financial regulation (e.g., higher bank capital requirements) and reduced holdings of dollar reserves.
- Notes:
- Description based on print version record.
- ISBN:
- 9798400232718
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