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Abstract

Central bank liquidity lines gained momentum since the global financial crisis and were used extensively throughout the pandemic. US dollar swap lines are well studied, but much less is known about the effects of liquidity lines in euros. Do ECB euro liquidity lines decrease Euro funding costs in the targeted economies? And are there positive spillbacks for the Euro Area Economies? Our paper answers these questions by studying the direct and indirect effects of ECB liquidity lines. We use a difference-in-differences strategy to show that the announcement of ECB euro liquidity lines has a direct positive signalling effect since the premium paid by foreign agents to borrow euros in FX markets decreases up to 76 basis points relative to currencies not covered by these facilities. Additionally, the paper provides suggestive evidence that these facilities generate positive spillbacks to the euro area since domestic bank equity prices increase by 6.7% in euro area countries highly exposed via banking linkages to countries whose currencies are targeted by liquidity lines.