POLICY MEASURES TO ALLEVIATE FOREIGN CURRENCY LIQUIDITY SHORTAGES UNDER AGGREGATE RISK WITH MORAL HAZARD

During the recent global financial crisis, certain central banks introduced two innovative cross-border operations to deal with the problems of foreign currency liquidity shortages: domestic liquidity operations using cross-border collateral and operations that supply foreign currency among central banks based on standing swap lines. We show theoretically that central banks improve the efficiency of equilibrium under foreign currency liquidity shortages using these two innovative temporary policy measures.