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Drawing the line: the politics of federal currency swaps in the global financial crisis

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  • Aditi Sahasrabuddhe

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.

Suggested Citation

  • Aditi Sahasrabuddhe, 2019. "Drawing the line: the politics of federal currency swaps in the global financial crisis," Review of International Political Economy, Taylor & Francis Journals, vol. 26(3), pages 461-489, May.
  • Handle: RePEc:taf:rripxx:v:26:y:2019:i:3:p:461-489
    DOI: 10.1080/09692290.2019.1572639
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    Cited by:

    1. Aizenman, Joshua & Ito, Hiro & Pasricha, Gurnain Kaur, 2022. "Central bank swap arrangements in the COVID-19 crisis," Journal of International Money and Finance, Elsevier, vol. 122(C).
    2. Tim Marple, 2021. "The social management of complex uncertainty: Central Bank similarity and crisis liquidity swaps at the Federal Reserve," The Review of International Organizations, Springer, vol. 16(2), pages 377-401, April.
    3. Botta, Alberto & Spinola, Danilo & Yajima, Giuliano & Porcile, Gabriel, 2023. "Pasinetti, Debt Sustainability and (Green) Structural Change at the Time of Global Finance: An Emerging and Developing Countries’ Perspective," CAFE Working Papers 25, Centre for Accountancy, Finance and Economics (CAFE), Birmingham City Business School, Birmingham City University.
    4. Yannis Dafermos & Daniela Gabor & Jo Michell, 2023. "FX swaps, shadow banks and the global dollar footprint," Environment and Planning A, , vol. 55(4), pages 949-968, June.
    5. Mathis L Richtmann & Lea Steininger, 2023. "From bazooka to backstop: the political economy of standing swap facilities," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 47(4), pages 681-702.
    6. Mustafa Yagci & Caner Bakir, 2021. "Bridging international political economy and public policy and administration research on central banking [The missing politics of central banks]," Policy and Society, Darryl S. Jarvis and M. Ramesh, vol. 40(4), pages 502-521.

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