Robert Kahn, Steven A. Tananbaum Senior Fellow for International Economics
Should the International Monetary Fund (IMF) and major central banks provide credit lines to countries facing sharp outflows of capital? In 2007, 2010, and 2011, the Federal Reserve's dollar-swap lines with other central banks played a critical role in stabilizing markets and ensuring an adequate supply of dollar liquidity. Now, in the context of sudden reversals of capital flows ("sudden stops"), there are proposals for new swap or credit arrangements for emerging markets and for the periphery of Europe. These proposals have their virtues, though perhaps not the ones their proponents claim.
Swap Lines, the Fed, and the IMF
The idea that the International Monetary Fund (IMF) should coordinate a global network of swap lines gained currency during the financial crisis, partly in response to complaints from countries excluded from the Fed's swap lines. The Fed's prudential concerns, along with a mandate to limit swaps to countries viewed as threatening global financial stability, highlighted gaps in the global safety net. In addition, the Fed's swap lines were temporary. The primary argument for a new arrangement rests on the observation that in today's financial markets—highly leveraged, complex, and interconnected—adequate liquidity is central to avoiding crisis. This suggests the need for something more comprehensive and permanent. Read more »
Looking Ahead: Kahn's take on the news on the horizon
There is insufficient pressure on either side to make a deal. As with the failed 2011-2012 "super committee," the conference committee charged with agreeing on funding for the remainder of the fiscal year would face the challenge of choosing the appropriate "sticks" to provide the correct incentives for both sides to agree on. Read more »
The government shutdown is a preclude to the debt-limit debate that will go on later this month. Despite limited market reactions to the shutdown, any failure by the government to pay on its obligations would be deeply unsettling. Read more »
The Fed announcement of no taper suggests a significant divergence of view about the prospects for recovery and the outlook for interest rates. Here are my thoughts on Chairman Bernanke's comments at the FOMC conference. Read more »
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