Exorbitant Privilege or Ultimate Responsibility: Access to International Lender of Last Resort (Job Market Paper)

As the issuers of the global reserve currency, the U.S. dollar, the Federal Reserve and the U.S. Treasury are the de facto international lender of last resort (ILLR) institutions in the global economy. Access to emergency liquidity in the U.S. Dollar is the most effective aspect of the global financial safety net. However, only some countries have access to the international lenders of last resort. In this paper, we explore the selective provision of emergency lending provided by the Federal Reserve, in the form of Reciprocal Currency Arrangements or swap lines, and in the form of a short term loan from the U.S. Treasury's Exchange Stabilization Fund. Furthermore, we investigate the economic and political factors in explaining the differential support provided by these lenders of last resort and the conditions under which this support is extended. We provide a historical account of the evolution of the role these ILLR institutions have played since 1962, and how the relationship between the Federal Reserve and the U.S. Treasury has changed in this regard. Thereafter, we estimate a panel logit model to assess the relative importance of several economic and political factors in explaining access to ILLR institutions between 1982 and 2018. We find that several political factors like capital account openness, trade and defense agreements with the United States, and party composition of the United States government play an important role in determining access to the ILLR institutions. We also confirm that the relative exposure of the assets of U.S. banks to an economy and an economy's share in US exports also play an important role. Therefore, this paper shows that even though these ILLR institutions are the only ones that have the capacity to serve as the International Lender of Last Resort, the extension of ILLR support is exercised in a discretionary and politically strategic manner.

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Trade Liberalization and Fiscal Stability: What the Evidence Tells Us (2020)

(with Kevin P. Gallagher and Rachel D. Thrasher) in Global Policy Journal, Volume 11, Issue 3, 2020. 

This paper evaluates the evidence as regards the extent to which trade liberalization has led to a decline in tariff revenue, total tax revenue, government expenditure, and government debt. Conventional theory generally predicts that when tariff losses do occur, they may be recouped through better forms of taxation – though a more sophisticated body of theory suggests otherwise. The empirical evidence is also mixed. Theory driven ex‐ante models of trade liberalization assume that trade agreements are revenue neutral. Ex‐post studies suggest that theory may hold in advanced and upper middle‐income economies. However, the consequences for lower income countries are a matter for concern. The majority of the evidence finds that low income countries lose trade tax revenue and are unable to recoup much of that lost revenue. At a time when fresh bilateral trade and investment treaties are being negotiated and WTO reform is on the global policy agenda, this paper highlights the need to design a treaty regime that enhances the ability of poorer nations to mobilize domestic resources without jeopardizing fiscal and financial stability. 

Link to Global Policy Journal. Please email me for a pdf if you are unable to access it. 

Public Banks and the Great Financial Crisis of 2007-2008 (2018)

(with Gerald Epstein) in Palgrave Studies in the History of Finance- Financial Innovation and Resiliency: A Comparative Perspective on the Public Banks of Naples (1462-1808), edited by Lilia Costabile and Larry Neal.

This paper explores whether financial institutions with a ‘public orientation’, including state owned banks and non-profit financial institutions, behaved ‘more socially productively’ than private financial institutions in the run-up and aftermath of the Great Financial Crisis of 2007-2008 (GFC). By ‘more socially productively’ in this context we mean, more specifically, whether they acted less ‘pro-cyclically’ (or more ‘counter-cyclically’) than other financial institutions, and therefore were a stabilizing force in this recent destructive financial episode.  We conclude that there is significant evidence for this conjecture: over-all, public banks' lending and socially oriented financial institutions such as socially responsible investment funds, behaved less pro-cyclically than did other financial institutions. We analyse reasons why this was the case and speculate about whether a larger footprint for public financial institutions in our economies would provide a stabilizing force without sacrificing much in terms of economic growth.

The Cost of Foreign Exchange Intervention: Trends and Implications (2018)

Chapter in The Political Economy of International Finance in an Age of Inequality, edited by Gerald Epstein, 2018

Central Banks around the world increasingly intervene in the foreign exchange market for a variety of reasons, such as maintaining exchange rate stability. In fact, research shows that central banks can lean against the macroeconomic policy trilemma through maintaining reserves and intervening in the foreign exchange market, and secure policy space. However, securing this policy space can come at substantial cost. In particular, there are substantial costs associated both with building and holding reserves of foreign exchange and using reserves to intervene in the foreign exchange market. This paper calculates the cost of foreign exchange intervention undertaken by central banks around the world, and examines how these costs are affected by country characteristics. The paper shows that foreign exchange intervention and the cost associated with it has increased substantially since the 1990s. Moreover, this cost is higher for developing and emerging economies, countries with more open capital accounts, and countries with access to a de factor international lender of last resort. The paper also makes policy recommendations for mitigating the costs of foreign exchange intervention.

Working Papers

Social policy advice to countries from the International Monetary Fund during the COVID-19 crisis: Continuity and change (2021)

(with Shahra Razavi, Helmut Schwarzer, Fabio Duran-Valverde, and Isabel Ortiz) International Labour Organization Working Paper 42, December 2021. 

This paper explores whether there has been a change in International Monetary Fund (IMF) policy advice and conditions in its loan programmes and Article IV surveillance by examining the 148 country reports for IMF programmes in 2020, in the context of significant shifts in its global macroeconomic policy framework during the COVID-19 pandemic. It documents the policy recommendations made in these reports and finds that the IMF has supported increased expenditure on health care and cash transfer programmes, often on a temporary basis, even when it meant higher fiscal deficit and public debt. However, it also finds that the IMF has supported fiscal consolidation and reduction of public debt even more frequently, in 129 of the 148 reports examined. This seems to corroborate the findings of a number of recent studies.

Given the pronounced gaps in social protection coverage, comprehensiveness and adequacy across all countries, it is essential that the measures taken to cope with the emergency do not remain a mere stopgap response, but progressively lead to the establishment or strengthening of rights-based national social protection systems, including floors. To do so, countries can and should pursue diverse financing options that are equitable in order to mobilize the financial resources needed for social investments, including investments in social protection systems and quality public services. 

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The Fiscal Impacts of Trade and Investment Treaties (2020)

(with Kevin P. Gallagher) [Under journal review] Global Economic Governance Initiative Working Paper Number 40, July 2020. 

Building on previous work, this paper examines the extent to which the latest wave of trade and investment treaties have impacted the fiscal stability of the world’s nations. By definition, trade liberalization reduces the amount of tariff revenue, which is a non-trivial component of the fiscal balance of many developing countries. We confirm this to be the case, but contrary to the assumptions in standard trade models, trade liberalization does not appear to be correlated with an automatic compensation for lost tariff revenue through other taxation measures. In fact, we find numerous situations where trade and investment treaties are correlated with a reduction in total fiscal revenues and an increase in government debt. These results suggest that analysts and policy-makers alike need to take the fiscal impacts of trade and investment liberalization into better account when making decisions about trade and investment policy. 

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Does greater Public Ownership in the Financial System Promote Superior Performance?: A Survey of the Literature (2017) 

Political Economy Research Institute Working Paper Number 446, December 2017. 

This paper examines whether greater prevalence of government-owned banks leads to qualitatively different outcomes. By reviewing the extensive literature on government-owned banks, the paper determines whether greater government participation in the financial system leads to greater financial stability and greater provision of finance for welfare generating activities. The evidence in literature suggests that the effects of government participation in the financial system are complex and context-dependent. This paper finds that while government banks not only provide finance that privately owned banks fail to provide and finance long-term projects that contribute to the capital development of an economy, they are also a stabilizing counter-cyclical influence in the economy. However, there is evidence to show that in several instances, government-owned banks have been used by politicians for the achievement of political goals. The paper also identifies gaps in the literature on government-owned banks, and avenues for future research. 

You can download the paper here.

Can Reserve Accumulation be Counterproductive?: The Unintended Consequences of Foreign Exchange Interventions  (2020)

[Draft: Please do not cite without permission]

Central Banks around the world increasingly intervene in the foreign exchange market for a variety of reasons, such as providing a protective buffer in the event of a sudden stop or reversal of capital flows. As a result, there has been an unprecedented accumulation of foreign exchange reserves on the balance sheets of central banks around the world, especially in developing and emerging economies. Therefore, several central banks have built some capacity to act as a lender of last resort, even when emergency liquidity required is not denominated in their own currency, thereby reducing the probability of default by borrowers in their country in the event of a financial crises. This paper examines whether the accumulation of reserves due to foreign exchange intervention can be counterproductive by encouraging the inflow of volatile capital flows that are linked to the occurrence of financial crises. Using panel data regression analysis, this paper finds that episodes of high reserve accumulation are likely to be followed by surges in inflows of capital within one year and five years, and a heightened probability of the occurrence of a currency crisis within five years. However, a higher level of foreign exchange reserve accumulation is associated with a lower probability of systemic banking crises.

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Policy Briefs 

Growing Share of Online Trade Undercuts Government Ability to Pull in Revenue (2020)

 (with Rachel D. Thrasher) Global Economic Governance Initiative Policy Brief 012,  July 2020.

You can access the policy brief here.

Work in Progress

Decolonizing Economics: A Guide to Theory and Practice (with Carolina Alves, Surbhi Kesar, and Ingrid Harvold Kvangraven) Polity Press, 2022.