Question

Critically analyze the need for and effects of dollar liquidity-swap lines. Also include the following in your explanation: 

What are dollar-liquidity swap lines? 

Why is there a need for the dollar liquidity-swap lines? 

Why has Federal Reserve extended the liquidity swap-lines to certain countries only? 

Can small island economies qualify for this swap? Explain.

Answer 1

Dollar liquidy swap lines are basically meant to stabilize the foreign excahnge markets and providing sufficient liquidity, as the on-going stress in the global financial markets due to Covid 19 induced health emergencies across the globe.

The public and private organizations in other countries who need dollar funding will get the dollar from their respective central banks using this facility.

1)the swaps provide participating central banks with dollars in exchange for their local currency (e.g., the Fed provides U.S. dollars to the Monterary authority of Singapore in exchange for an equal value of Singapore Dollar at the market exchange rate). The Monterary authority of Singapore then provides US Dollars to institutions in its jurisdiction—namely, Singapore banks—who in turn channel funding to their clients.

After the end of the swap period usually after 84 days, there is an option to rollover upto another 3 months, or can be terminated usuing the initial excahnge rate used at the time of entering the swap.

2) In terms of distress in the economy, the demand for dollar increases and the exchange rate volitilty further dampens the prospects of all the major economies. By locking the exchange rate and providing stable funding flows interms of distress helps countries to copeup with the uncertain times.

3) The facility is extended to few countries where the dollar liablities in their books exceeds the dollar assets and are major economies or to developing economies where there are prior agreements with US. Another the dollar swap lines facility is extended to the countries whose Organsations' substatial equity is held by the US financial institutions or individuals. This facility is not extended to countries like China, as the dollar assets and reserves are more than the dollar liablities in the books of Chinese central banks

4)No. the list of countries which gets this facility is already finalized by the Fed. Below are  the cental banks which get the swap lines -

Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank. On March 19, 2020, it added temporary swap arrangements with the Reserve Bank of Australia, the Banco Central do Brasil, Danmarks Nationalbank (Denmark), the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, the Norges Bank (Norway), the Monetary Authority of Singapore, and the Sveriges Riksbank (Sweden) to be in place for at least six months.