Central Banks as Dollar Lenders of Last Resort: Implications for Regulation and Reserve Holdings
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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Copy CitationMitali Das, Gita Gopinath, Taehoon Kim, and Jeremy C. Stein, "Central Banks as Dollar Lenders of Last Resort: Implications for Regulation and Reserve Holdings," NBER Working Paper 30787 (2022), https://doi.org/10.3386/w30787.Download Citation
Published Versions
Mitali Das & Gita Gopinath & Helene Hall & Taehoon Kim & Jeremy C. Stein, 2026. "Central Banks as Dollar Lenders of Last Resort: Implications for Regulation and Reserve Holdings," American Economic Journal: Macroeconomics, vol 18(3), pages 1-41.
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