Central Banks as Dollar Lenders of Last Resort: Implications for Regulation and Reserve Holdings

Released on by Ms. Mitali Das
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  • Central Banks as Dollar Lenders of Last Resort: Implications for Regulation and Reserve Holdings Book Detail

  • Author : Ms. Mitali Das
  • Release Date : 2023-01-18
  • Publisher : International Monetary Fund
  • Genre : Business & Economics
  • Pages : 61
  • ISBN 13 :
  • File Size : 87,87 MB
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Central Banks as Dollar Lenders of Last Resort: Implications for Regulation and Reserve Holdings by Ms. Mitali Das PDF Summary

Book Description: 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.

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