TY  - JOUR
AU  - Obstfeld,Maurice
AU  - Shambaugh,Jay C.
AU  - Taylor,Alan M.
TI  - Financial Instability, Reserves, and Central Bank Swap Lines in the Panic of 2008
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14826
PY  - 2009
Y2  - March 2009
UR  - http://www.nber.org/papers/w14826
L1  - http://www.nber.org/papers/w14826.pdf
N1  - Author contact info:
Maurice Obstfeld
Department of Economics
University of California, Berkeley
530 Evans Hall #3880
Berkeley, CA 94720-3880
Tel: 510/643-9646
Fax: 510/642-6615
E-Mail: obstfeld@econ.berkeley.edu

Jay C. Shambaugh
McDonough School of Business
Georgetown University
542 Hariri
Washington, DC 20057
Tel: 202/687-6625
E-Mail: jcs264@georgetown.edu

Alan M. Taylor
Department of Economics
University of Virginia
Monroe Hall
Charlottesville, VA 22903
Fax: (434) 982-2904
E-Mail: alan.m.taylor@virginia.edu
AB  - In this paper we connect the events of the last twelve months, "The Panic of 2008" as it has been called, to the demand for international reserves. In previous work, we have shown that international reserve demand can be rationalized by a central bank's desire to backstop the broad money supply to avert the possibility of an internal/external double drain (a bank run combined with capital flight). Thus, simply looking at trade or short-term debt as motivations for reserve holdings is insufficient; one must also consider the size of the banking system (M2). Here, we show that a country's reserve holdings just before the current crisis, relative to their predicted holdings based on these financial motives, can significantly predict exchange rate movements of both emerging and advanced countries in 2008. Countries with large war chests did not depreciate -- and some appreciated. Meanwhile, those who held insufficient reserves based on our metric were likely to depreciate. Current account balances and short-term debt levels are not statistically significant predictors of depreciation once reserve levels are taken into account. Our model's typically high predicted reserve levels provide important context for the unprecedented U.S. dollar swap lines recently provided to many countries by the Federal Reserve.
ER  -