Do the People's Bank of China's currency swaps cause moral hazard?

This study explores the moral hazard arising from currency swaps conducted by the People's Bank of China (PBoC), namely, its negative impact on foreign exchange reserves. On the basis of data from 183 economies from 2007 to 2022, this study uses the difference-in-differences (DiD) method and finds that the PBoC's currency swaps have generated moral hazard, leading to a decrease in foreign exchange reserves. The negative impact of the PBoC's currency swaps on the foreign exchange reserves of emerging economies and capital account open economies is greater, and moral hazard is stronger. The moderation analysis indicates that as political ties between China and other countries strengthen, the negative impact of the PBoC's currency swaps on foreign exchange reserves increases, and moral hazard intensifies. These findings have practical implications for enhancing the operational mechanism of central bank currency swaps as well as managing swap risks and costs.