nep-ifn New Economics Papers
on International Finance
Issue of 2020‒12‒14
two papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. How the Federal Reserve's Central Bank Swap Lines Have Supported U.S. Corporate Borrowers in the Leveraged Loan Market By Annie McCrone; Ralf R. Meisenzahl; Friederike Niepmann; Tim Schmidt-Eisenlohr
  2. Credit Risk and the Transmission of Interest Rate Shocks By Berardino Palazzo; Ram Yamarthy

  1. By: Annie McCrone; Ralf R. Meisenzahl; Friederike Niepmann; Tim Schmidt-Eisenlohr
    Abstract: The cost of borrowing U.S. dollars through foreign exchange (FX) swap markets increased significantly in the beginning of the Covid-19 pandemic in February 2020, indicated by larger deviations from Covered Interest Rate Parity (CIP). CIP deviations narrowed again when the Federal Reserve expanded its swap lines to support U.S. dollar liquidity globally—by enhancing and extending its swap facility with foreign central banks and introducing the new temporary Foreign and International Monetary Authorities (FIMA) repurchase agreement facility.
    Date: 2020–11–12
  2. By: Berardino Palazzo (Board of Governors of the Federal Reserve System); Ram Yamarthy (Office of Financial Research)
    Abstract: Using daily credit default swap (CDS) data going back to the early 2000s, we find a positive and significant relation between corporate credit risk and unexpected interest rate shocks around FOMC announcement days. Positive interest rate movements increase the expected loss component of CDS spreads as well as a risk premium component that captures compensation for default risk. Not all firms respond in the same manner. Consistent with recent evidence, we find that firm-level credit risk (as proxied by the CDS spread) is an important driver of the response to monetary policy shocks - both in credit and equity markets - and plays a more prominent role in determining monetary policy sensitivity than other common proxies of firm-level risk such as leverage and market size. A stylized corporate model of monetary policy, firm investment, and financing decisions rationalizes our findings.
    Keywords: credit risk, CDS, monetary policy, shock transmission, equity returns
    Date: 2020–12–03

This nep-ifn issue is ©2020 by Vimal Balasubramaniam. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.