A Study of Central Bank Swap Line Use: Are They a Suitable Tool for the IMF in Maintaining Central Bank Liquidity for Developing Countries?

Abstract

Developing countries do not have the same access for swap line use during times of economic stress, currently used by central banks in developed countries to maintain liquidity. Biblically, economic tools should favor all and not just developed nations. As Christians we are commanded to help others by bearing the burden of others and to help the poor. Of course, biblical wisdom is necessary, specifically an understanding of how exactly swap lines may be of benefit before making any recommendations, along with and considering the reality of level of risk when working with developing nations. Swap lines are a currency exchange between two banks where an agreed upon amount is traded-- a liquidity swap between two banks. The research on swap line use is limited, especially when related to use by developing countries. Since developing nations are more vulnerable to economic stress, expanding the use of swap lines from developed countries to developing nations appears reasonable and the IMF being the lender of last resort is the recommended organization to use them. The purpose of the study is to determine if swap lines maintain or improve liquidity between central banks during times of economic stress, which in turn will be considered for feasibility as an additional financial assistance tool the IMF can use for developing countries. A pragmatic mixed approach will be used to determine if swap lines are improving liquidity conditions with the capacity to deliver U.S. dollar funding to institutions in their jurisdiction during times of market stress. The comparisons consider capital flow and foreign exchange rate differences between countries that used swap lines and countries not using swap lines during periods of economic stress. The results will be considered for use by the IMF for developing countries.