Abstract
Central bank liquidity lines have gained importance as a cross-currency liquidity management tool with the intention to prevent threats to financial stability. We provide a com plete timeline of ECB liquidity line announcements and quan tify their signaling effect. The premium to borrow euros in FX markets is estimated to decrease by 51 basis points upon announcement. Moreover, we test for spillbacks and find that bank stock prices increase by around 2.1 percent in euro-area countries highly exposed via banking linkages to currencies targeted by liquidity lines. The mechanism behind this novel result is illustrated in a stylized bank default model.
Authors
- Silvia Albrizio
- Iván Kataryniuk
- Luis Molina
- Jan Schäfer
JEL codes
- E44
- E58
- F33
- G15