http://orcid.org/0000-0003-4835-6498
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Abstract
Injecting over two trillion dollars into the international economy, the Federal Reserve effectively operated as an international lender of last resort during the 2008 financial crisis. Over half a trillion dollars went to foreign central banks through bilateral arrangements known as Central Bank Liquidity Swaps. While studies show that a key determinant of a country’s chances of receiving Fed liquidity was the exposure of US banks to the foreign economy, the literature overlooks the ambiguous and politicized nature of the Fed’s decision-making that explains the selection of emerging market swap recipients. Through a consideration of all economies that officially requested a swap line, including those rejected, this article analyses the bilateral politics of Fed swaps. By evaluating transcripts of the Fed’s deliberations, it identifies strategic motivations underlying the Fed’s decision-making and argues the Fed was more likely to grant a swap to economies that shared its policy preferences for greater capital account openness. Further, the article argues that the influence of shared policy preferences was mediated by political and diplomatic considerations. The article concludes that the Fed strategically chose its emerging economy partners to reinforce economic alliances, particularly with those who experienced increased influence in economic governance post-2008.
Acknowledgments
The author thanks Jonathan Kirshner and Thomas Pepinsky for their generous support and insightful comments on multiple version of this article; Eswar Prasad, Peter Katzenstein, Christopher Way, Gustavo Flores-Macías, Peter Enns and three anonymous reviewers whose comments on various iterations of the article were vital in strengthening the article. Earlier versions of this article were presented at the 2017 ISA Annual Convention in Baltimore, the 2017 Midwest Political Science Association Annual Conference in Chicago and the June 2017 workshop on the International Monetary System at the Center for European Studies, Harvard University and the 2017 International Political Economy Society Annual Conference in Austin. I thank all participants for their feedback. Any remaining errors are my own.
Disclosure statement
No potential conflict of interest was reported by the author.
Notes
1 The European Central Bank (ECB), the Bank of Japan (BoJ) and the People’s Bank of China (PBoC) also extended swaps of approximately US$300bn. Around 25% of total swaps from the five central banks went to emerging and developing countries (EMDs). The Fed and PBoC ‘about evenly’ provided over US$200bn to EMDs (Gallagher, Citation2015, p. 76). Between 2008 and 2013, the PBoC extended up to RMB2.5tn in RMB swaps to twenty-three countries (Jiang, Citation2014).
2 Although Korea and Singapore were not considered EMEs in 2008, they were unambiguously referred to as such in the Federal Open Markets Committee and are therefore referred to as EMEs in this article.
3 This refers to refers to mini- and multi-lateral governance agreements and international institutions created to manage the global economy.
4 These were the central banks of the United Kingdom, Denmark, Norway, Sweden, Switzerland, Canada, Japan Australia, New Zealand, Brazil, Mexico, Korea and Singapore.
5 I have only listed those requests which have been independently verified through alternative channels. This list may not be exhaustive.
6 To ensure continuity, the G20 Presidency each year is supported by a ‘troika’ made up of the current, immediate past and future host countries. It is distinct from the European troika – the European Commission, the ECB and the IMF.
7 Mexico had a capital account openness level of 0.6, as per an updated version of the Chinn-Ito index, normalized to a scale of 0 to 1 (Aizenman, Chinn, & Ito, Citation2013). Higher values of the index indicate that a country is more open to cross-border capital transaction.
8 The level of Financial Openness for Brazil is 0.653, as per the Aizenman, Chinn and Ito (Citation2013) ‘Trilemma’ Index measures.
9 And sometime including Russia and South Africa, to make up the BRICS.
10 0.164 on the ‘Trilemma Index’
11 Although currency convertibility is not synonymous to capital account openness, it has implications for openness to the extent that it can affect foreign exchange trade, the free flow of capital across borders (Johnston & Swinburne, Citation1999).
12 I thank J.L. Broz for sharing the data and supplemental materials used in the analysis.
13 Without an exhaustive list of countries that requested swaps, we cannot infer the influence of financial openness on whether or not a country would request a swap in the first place. It is of course possible that countries with lower levels of openness were unlikely to request Fed assistance. These results must therefore be taken with a degree of caution.
14 Note that we do not have an exhaustive list of all countries whose swap requests to the Fed were denied.
15 Measured using the Chinn-Ito KAOPEN index of capital account openness based on information regarding cross-border economic and financial restrictions in the International Monetary Fund’s Annual Report of Exchange Arrangements and Exchange Restrictions. The Chinn-Ito KAOPEN index is normalized to range from 0 to 1, where higher values indicate more openness. The data are sourced from the Aizenman, Chinn and Ito (Citation2008; Aizenman et al., Citation2013) ‘Trilemma Indexes’, measuring the degree of achievement along three dimensions of the ‘trilemma’ hypothesis, updated 1 July 2016.
16 BIS, Consolidated Banking Statistics, Table 9B, Foreign claims by nationality of reporting banks, immediate borrower basis.
17 These data in Barbieri and Keshk (Citation2012).
18 These data are available from the World Economic Outlook (WEO) Database and from Beck, Demirgüç-Kunt, and Levine (Citation2000). For the Eurozone, the values for the twelve countries under the ECB’s jurisdiction are summed together, as of 2007 (Broz, Citation2015).
19 These data are available in the WEO Database and from Beck et al. (Citation2000).
20 This variable is also highly correlated with Bank Exposure as the larger economies are, on average, more internationalized. Given that that the Fed considered both the exposure of US banks as well the systemic importance of foreign economies in its selection process, creating an index of these variables is not theoretically viable. As such, this analysis does face a problem of multicollinearity.
21 Inflation data are taken from the IMF’s International Financial Statistics.
22 Measured as s central bank’s total international reserves (excluding gold) as a share of GDP. Available in the IMF International Financial Statistics, series RAXGFX.