What Drives Central Bank Swap Lines Use?

Historically, currency swap lines between central banks were used to provide liquidity assistance to countries and as a means to influence exchange rates and offshore money market interest rates, such as the London interbank offered rate (LIBOR). Allen, Galati, Moessner, and Nelson (2017) conclude that the driving factor of swap line use by the European Central Bank during the Great Financial Crisis (GFC) and European debt crisis was dislocations in Eurodollar money markets as indicated by spreads of LIBOR from OIS. and had less to do with pressures in the foreign exchange swap markets. However, this conclusion is generalized from the study of one currency pair, EUR-USD. This paper extends their analysis by taking a panel data approach to the question of what drives swap line use among the five central banks within the Federal Reserve network with standing swap line arrangements. The period of study is also extended from GFC to the most recent Covid-19 crisis. The results find support for Allen et al.'s generalization. The empirical results also support the narrative that central banks are more concerned with money markets and, therefore, LIBOR's behavior, given its potential to interfere with monetary policy transmission and exacerbate financial instability