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Dollar Shortage, Central Bank Actions, and the Cross Currency Basis

Jean-Marc Bottazzi, Capula and Paris School of Economics
Jaime Luque, University of Wisconsin-Madison
Mario Pascoa, University of Surrey

Abstract

Cross-currency basis, which captures the deviations from covered interest rate parity, reflects the relative value of the scarcer currency (US dollars) as collateral in the funding constraints faced by European banks. The October 15 2008 announcement by the ECB that all bids for US dollars by European banks would be fully allotted represented an autonomous increase in the supply of US dollars. Treating this announcement as an exogenous event, we show that the basis significantly narrowed after the ECB announcement. We also show that the shortage during 2010-2012 is primarily driven by ECB's penalty rates as opposed to quantity rationing.

Suggested Citation

Jean-Marc Bottazzi, Jaime Luque, and Mario Pascoa. 2014. "Dollar Shortage, Central Bank Actions, and the Cross Currency Basis" The SelectedWorks of Jaime Luque
Available at: http://works.bepress.com/luque/9

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