- Brother, Can You Spare a Billion? The United States, the IMF, and the International Lender of Last Resort. Oxford University Press. [buy on Amazon]
ABSTRACT: When financial crises occur, it has long been accepted that national economies need a lender of last resort to stabilize markets. In today’s global financial system, crises are rarely confined to one country. Indeed, they often go global. Yet, there is no formal international lender of last resort (ILLR) to perform this function for the world economy. Conventional wisdom says that the International Monetary Fund (IMF) has emerged in recent decades as the de facto ILLR. Yet, that premise is incomplete. This book explores how the United States has for decades regularly complemented the Fund’s ILLR role by selectively providing billions of dollars in emergency loans to foreign economies in crisis. Why would U.S. policymakers ever put national financial resources at risk to “bailout” foreign governments and citizens to whom they are not beholden when the IMF was created for this purpose? I argue the United States has been compelled to provide such rescues unilaterally when it believes a multilateral response via the IMF is either too slow or too small to protect vital U.S. economic and financial interests. Through a combination of historical case studies and statistical analysis, I uncover the defensive motives behind U.S. decisions to provide global liquidity from the 1960s through the 2008 global financial crisis. The book paints a more complete picture of how international financial crises have been managed and highlights the unique role that the United States has played in stabilizing the world economy in troubled times.
- Systemic Strengths, Domestic Deficiencies: The Renminbi's Future as a Reserve Currency. (with David Steinberg) Journal of Contemporary China (forthcoming)
ABSTRACT: Will China’s currency, the renminbi (RMB), become as a major international reserve currency that rivals the US dollar in the next decade? This paper argues that this is unlikely for domestic political and economic reasons. China has some important systemic advantages that other recent challengers to the dollar have lacked, such as a large economy, major role in the international trading system, and substantial military capabilities. However, China’s domestic political system poses an important barrier to the internationalization of its currency. Chinese political institutions and financial policies reduce the attractiveness of the RMB as a reserve currency. Strong opposition to financial reform from Chinese interest groups has blocked financial reforms that would enhance the RMB’s attractiveness, and is likely to prevent substantial liberalizing reform in the future. Moreover, changes in China’s political economy during the Xi Jinping era (2012-present) have exacerbated these domestic deficiencies. Due to these various domestic political obstacles, the RMB is unlikely to emerge as a top reserve currency in the next ten years.
- Emergent International Liquidity Agreements: Central Bank Cooperation after the Global Financial Crisis. Journal of International Relations and Development (forthcoming)
ABSTRACT: Central bank currency swap agreements have proliferated rapidly among emerging market economies (EMEs) since 2008. More than 80 such agreements have been signed in recent years. The accumulation of these agreements has resulted in the emergence of a new $1 trillion liquidity system by 2015. What explains the rapid proliferation of these agreements? What are the political and economic implications of the liquidity network for the international monetary and financial systems? I specify two key consequences of the global financial crisis and its aftermath that have led EME central banks to seek out swap agreements: volatile international capital flows and a recognition of the risks of dollar dependence in trade. I conclude that these liquidity agreements are unlikely to affect much change in the international monetary system. However, the system is transforming the international financial system through the creation of large liquidity lines for systemically important EMEs.
- Need for Speed: The Lending Responsiveness of the IMF. Review of International Organizations (2017) [replication data]
ABSTRACT: How responsive a lender is the International Monetary Fund (IMF)? In this paper, I introduce new data on IMF loan approval periods: The days that transpire between when a borrower submits a Letter of Intent to the Executive Board requesting a loan and when the Board approves that request. The data reveal considerable variation across requests. Why are some loan requests approved swiftly while others wait much longer for approval? I argue that the financial interests of the G-5 economies drive variation in responsiveness contingent on when a request was made. I expect that during much of the 1980s, as G-5 commercial bank exposure increases, borrowers will face longer waits for approval. In such cases, the G-5 should have been more likely to press for the use of the "concerted lending" strategy. This protected G-5 financial systems by catalyzing private financing on behalf of those countries, but it also delayed loan approval. Into the 1990s, global capital flows grew more complex and catalyzing private capital flows required a swift response. Thus, during these years I expect increased G-5 bank exposure to be associated with shorter waits for approval. In such cases, the G-5 should have been more likely to press for accelerated approval. A quick response would have the best chance of attracting back private capital and reduce the threat posed by the crisis. Statistical analyses of 275 loan requests from 1984-2012 support these expectations.
- No Reservations: International Order and Demand for the Renminbi as a Reserve Currency. (with Steven Liao) International Studies Quarterly (2016) [replication data]
- Redback Rising: China’s Bilateral Swap Agreements and Renminbi Internationalization. (with Steven Liao) International Studies Quarterly (2015) [replication data]
ABSTRACT: For several years now China has implemented policies to promote the international use of its national currency, the Renminbi (RMB). As part of these efforts, the People’s Bank of China (PBC) has negotiated 24 bilateral currency swap agreements (BSAs) with foreign central banks that make it easier for firms in both China and its partner countries to settle cross-border trade and direct investment in RMB. We seek to explain why China and these countries are cooperating via BSAs. We theorize that trade and direct investment interdependence are linked to dyadic BSA cooperation via two mechanisms: financing insulation from international liquidity shocks and reduced transaction costs of cross-border exchange for local firms. Additionally, we expect the presence of preferential trade agreements (PTAs) and bilateral investment treaties (BITs) will increase the probability of dyadic BSA cooperation. BSAs are natural extensions of these existing agreements representing an additional layer of state-level formal cooperation further reducing barriers to cross-border trade and direct investment. Our empirical analysis finds that both de facto trade interdependence and de jure economic integration via PTAs and BITs increase the probability of BSA cooperation between China and partners. These findings are robust to alternative measures, model specifications, and methods.
- The U.S. as Sovereign International Last-Resort Lender: The Fed’s Currency Swap Program during the Great Panic of 2007-2009. New Political Economy (2012)
ABSTRACT: Beginning in late-2007 and culminating in autumn 2008, the US Federal Reserve took extraordinary action to address global dollar scarcity through the provision of dollar swap lines with a total of 14 foreign central banks. At their peak, these emergency credit lines provided nearly $600 billion in financing to economies starved of dollars. This case represents an archetypal example of ‘sovereign international last-resort lending’. he article explores this case in order to engage the following two questions. First, what criteria qualify a state to play the role of international lender of last resort (ILOLR)? Second, under what conditions will a state with the capacity to act choose to do so? The article argues that the primary factor from which states derive the capacity to act as ILOLR is the international status of their national currency. Additionally, it contends that states with the capacity to act as ILOLR do so for defensive reasons. Examining the Fed’s swap programme, three spillover effects are identified that threatened the US economy and motivated the US central bank to engage in defensive international last-resort lending during the crisis: financial system exposure, interest rate concerns, and a dramatic appreciation in the dollar’s exchange rate.
ABSTRACT: This paper argues that credit rating agencies’ perceptions of democratic institutions are endogenous to familiarity and experience. Consequently, we expect that ratings agencies from stable democracies tend to view the presence of democratic institutions as reducing sovereign risk. On the other hand, rating agencies from non-democratic countries should tend to view the presence of democratic institutions more ambiguously or even negatively. To test this argument, we exploit the recent emergence of a globally active Chinese rating agency: Dagong Global Credit Rating. Specifically, we compare the institutional determinants of sovereign ratings of this Chinese agency with the three big U.S.-based agencies—Fitch, Moody’s, and S&P—over the 2010-2014 period. Our econometric analysis provides evidence that democratic sovereigns enjoy a ‘democratic advantage’ with the US agencies. However, being a democracy does not pay off when assessed by Chinese Dagong. This research holds broader implications on how the global power shifts towards emerging economies that have no or less experience with democracy are likely to affect the valuation of democratic institutions.