International reserves and swap lines: the recent experience

摘要: The global crisis has witnessed an unprecedented rise of swap agreements between central banks of larger economies and their counterparts in smaller economies. This chapter explores whether such swap lines can reduce the need for reserve accumulation. The evidence indicates that there is only limited scope for swaps to substitute for reserves. For one thing, swap lines are extended only to fundamentally sound emerging markets, and to important trade partners. Crucially, sound fundamentals include ample foreign-exchange reserves. The highly selective nature of swap recipients means that only a small minority of developing countries will have access to swap facilities. Moreover, large central banks provide liquidity support only when it is in their self-interest. When market confidence is shattered, as happened in the case of the Republic of Korea during the 4th quarter of 2008, reserves fail to perform their precautionary function, even if the economy has sound fundamentals. The timing of market movements