Political Economy of the Global Monetary System
Friday, Jan. 3, 2020 8:00 AM - 10:00 AM (PDT)
- Chair: Devika Dutt, University of Massachusetts-Amherst
Blowing against the Wind? A Narrative Approach to Central Bank Foreign Exchange Intervention
AbstractStudies on the effectiveness of central bank intervention yield mixed results and poorly deal with endogeneity. By using a narrative approach, this paper is the first to deal with intraday changes in market conditions to show the real effect of central bank foreign exchange intervention on exchange rates. Some studies find that intervention works in up to 80% of cases. By accounting for intraday market moving news, I find that in adverse conditions, the Bank of England only managed to influence the exchange rate in 8% of cases. I use both machine learning and human assessment to confirm the validity of the narrative assessment.
The Political Economy of Federal Reserve Banking: Historical Precedent, Future Possibilities and Possible Responses
AbstractThe Federal Reserve faces some of the steepest challenges to its authority since gaining independence from the U.S. Treasury in 1951. Relentless public criticism from executive government and the rising popularity of modern monetary theory signal that tenets of monetary policy orthodoxy (like the assumption central banks should be independent and target low inflation) are now under increasing political scrutiny. This paper compares the current challenges to Federal Reserve authority with historical contests to Federal Reserve policymaking and considers the central bank’s distinctive role in the U.S. economy. In so doing, it highlights the three major, political-economy challenges to the Federal Reserve’s current operating framework: (i) the political legitimacy of asset market-led policymaking in an environment of wage stagnation, (ii) the political sustainability of balance-sheet policymaking and fiscal austerity, and (iii) the viability of inflation-targeting in a world of secular stagnation. The paper then considers how the Federal Reserve is likely to respond to these challenges with reference to historical analogues. By analyzing the emergence of contemporary central banking through the lens of Minsky’s “learning game” model of central banking, it argues that the Federal Reserve has historically overcome challenges by establishing harmony with fiscal policy routines and quarantining inflation in asset markets. The discussion therefore concludes with a consideration of the ways in which Federal Reserve operations are likely to change in response to emerging political challenges.
Oliver Levingston, PhD Candidate, Political Economy, University of Sydney, Australia
Exorbitant Privilege or Ultimate Responsibility? Access to the International Lender of Last Resort
AbstractThe Global Financial Safety Net is crucial insofar as it can provide emergency liquidity to countries that require it like an international lender of last resort and help stabilize the global economy. However, some parts of the Global Financial Safety Net are more effective than others. Access to central bank swap lines, and swap lines from the Federal Reserve in particular, is particularly important. There is some evidence for this, as other aspects of the global financial safety net, such as accumulation of foreign exchange reserves, are rendered less important with access to central bank swap lines: countries that have access to swap lines from the Federal Reserve, hold fewer reserves. Given that the US Dollar is the global reserve currency, the Federal Reserve has become the de facto international lender of last resort in the global economy. However, very few countries have historically had access to swap lines from the Federal Reserve. This begs the question: what determines access to emergency financial assistance from the United States, either in the form of a central bank swap line or emergency loan arrangement from the Exchange Stabilization Fund of the U.S. Treasury? Do these institutions provide emergency liquidity to the countries that have strong linkages with the U.S. economy, countries that exhibit “good” policy behavior, countries that can help the U.S. further its foreign policy objectives, or some combination thereof? This paper explores this question by using historically instances of the extension of swap lines from the Federal Reserve to estimate the factors that determine access to it.
- F3 - International Finance