Elasticity and Discipline in the Global Swap Network

Abstract:

This article sketches the outlines of the new international monetary system that has emerged in the aftermath of the global financial crisis. At the center of the system, a network of central bank swaps between the six major central banks serves as an elastic backstop for private foreign exchange operations. Farther out on the periphery, an added network of central bank swaps operates to economize on scarce reserves of the major currencies. Meanwhile, in the private foreign exchange market, basis swaps are emerging as the central location where liquidity is explicitly priced, inside the bounds set by central bank swaps.

Keywords:

• central bank swaps
• foreign exchange stabilization
• international monetary system

Notes

Put another way, the problem in these countries is often excess discipline imposed from the outside by the international payments system. To be sure, in many cases international discipline bites precisely because of excess elasticity (insufficient discipline) in the domestic payments system, but even that problem can be as much a consequence as a cause of financial underdevelopment. The essential hybridity of domestic central banks, which serve everywhere both as government bank and bankers’ bank, is in these cases as a rule overweighted on the government bank side. Official credit does what in a more developed country would be the province of private credit, and sometimes it overdoes it.

Along these lines, Mehrling (2016) offers a revisionist account of the Keynes–White debate at Bretton Woods.

See http://brics6.itamaraty.gov.br/media2/press-releases/214-sixth-brics-summit-fortaleza-declaration/. http://www.project-syndicate.org/commentary/chinese-renminbi-in-currency-basket-for-imf-sdr-by-harold-james-and-domenico-lombardi-2015-07/.

This set of lines was announced October 31, 2013, http://www.federalreserve.gov/newsevents/press/monetary/20131031a.htm. For contract details, see http://www.newyorkfed.org/markets/liquidity_swap.html.

The 70 billion renminbi swap line with Argentina is no exception, even though apparently it was used to acquire dollars by selling the renminbi acquired through the swap (McDowell 2015: 29). The effect is to move reserves around, not to create additional reserves.

The following analytical account draws heavily on the institutional detail provided by Stigum and Crescenzi (2007: 209–300).

The following analytical account draws heavily on the institutional detail provided by DeRosa (2013).

The figure as well as the following three paragraphs are drawn from Mehrling (2013: 357–58).

Taking our own cue from CIP, we adopt the convention of booking forward transactions as a pair of term credits, lending in one currency and borrowing in another.

Among other places, in his 1975 essay, “The SDR as International Money,” reprinted in Kindleberger (1981: 69).

Additional information

Notes on contributors

Perry Mehrling

Perry Mehrling is a professor of economics at Barnard College, Columbia University. The original version of this paper was prepared for a conference on “China and the Global Financial System” August 6–7 in Shanghai, China, that was jointly sponsored by the Institute for New Economic Thinking and the Shanghai Development Research Foundation. The author owes a special debt to Camila Duran, Tom Ferguson and Yu Yongding for helpful conversation as this paper was being written.