- Brother, Can You Spare a Billion? The United States, the IMF, and the International Lender of Last Resort. Oxford University Press (2017). [buy on Amazon]
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.
- Financial Sanctions and Political Risk in the International Currency System. Review of International Political Economy (Forthcoming)
Scholarship on international currencies has traditionally emphasised how an issuing state’s foreign policy can enhance the attractiveness of its currency for cross-border use. Yet, foreign policy actions need not only boost a currency’s international appeal—they may also undermine it. This study introduces a general theory of how US foreign policy can influence governments’ policy orientations toward the dollar in positive or negative ways. Policies like financial sanctions generate ‘political risk’ that weaken the dollar’s attractiveness for international use. The study tests the claim that the United States’ use of financial sanctions incentivises targeted governments to implement de-dollarization policies. I employ a most-likely case study design, presenting evidence from three countries targeted by US sanctions: Russia, Venezuela, and Turkey. In each instance, the evidence shows that financial sanctions created political risk concerns by generating expectations of future direct costs of dollar use. These expectations set off policy efforts by targeted governments to reduce their economies’ exposure to the currency. This study raises important questions about the long-term efficacy of an approach to foreign policy that relies on financial sanctions as a primary means of leverage over foreign adversaries as overuse may undermine the effectiveness of the tool itself.
- Payments Power: The Overlooked Role of the Dollar as Top International Payments Currency. International Studies Perspectives (Forthcoming)
This paper is a contribution to a symposium entitled "Global Monetary Order and the Liberal Order Debate." My contribution considers the role of the US dollar as the top international payments currency. It explains how dominance in this arena is an important power resource for the United States, enabling the US to more effectively practice economic statecraft through the use of financial sanctions. I also consider how—perhaps paradoxically—use of this power may chip away at the dollar's supremacy in payments over time.
- The Impact of Economic Coercion on Public Opinion: The Case of US-China Currency Relations.
(with Dimitar Gueorguiev and David A. Steinberg) Journal of Conflict Resolution (Forthcoming)
When one country’s economic policies have negative repercussions on their trading partners, foreign states will often pressure the home country to change course. Whether external pressure succeeds in changing the target state’s policies often depends on how domestic audiences react to outside pressure. This paper examines how external pressure influences public support for policy change. We consider three mechanisms through which external pressure might alter public opinion: by changing individuals’ interests, by activating their national identities, and by providing them with new information about a policy’s distributive effects. To test these rival explanations, we focus on the case of China-US currency relations. Using data from a survey experiment of Chinese internet users, we find strong support for the informational updating theory. Compared to individuals that received no information about the US position, those that were informed that the US had encouraged China to appreciate its exchange rate and those that were told that the US had threatened to punish China if it did not appreciate were more likely to believe that appreciation would be good for the US. Moreover, among those with a negative view of America, the “U.S. threat” and “U.S. endorsement” treatments reduced support for appreciation. The evidence therefore suggests that external pressure can reduce support for policy change because it leads individuals to believe that a policy serves the interests of rival states at the expense of their own country.
- The (Ineffective) Financial Statecraft of China's Bilateral Swap Agreements. Development and Change (2019)
Since 2008, the People’s Bank of China (PBOC) has signed bilateral swap agreements (BSAs) with 35 foreign central banks. Collectively, these deals make nearly $500 billion in Chinese renminbi (RMB) available to Beijing’s foreign partners. What has led China to be so aggressive in its efforts to sign so many swap agreements? What are the political economic implications of the swap program for the US-centric global economic order? China’s BSAs can be understood as a form of financial statecraft: The use of national financial and monetary capabilities to achieve foreign policy ends. China has deployed BSAs for both defensive and offensive reasons. Defensively, Beijing has sought to use BSAs to promote trade settlement in RMB thereby reducing its vulnerability to the dollar’s structural dominance in trade. Yet, as I explain, they have been ineffective in this regard. Offensively, Beijing has used BSAs as a short-term liquidity backstop outside of the Bretton Woods institutions for partner countries in need. Here, there is greater potential for BSAs to impact the status quo economic order by enhancing Chinese economic influence. However, their potential is dependent on Beijing’s willingness to act as a unilateral crisis lender and its ability to further internationalize the RMB.
- Systemic Strengths, Domestic Deficiencies: The Renminbi's Future as a Reserve Currency. (with David Steinberg) Journal of Contemporary China (2017)
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 (2017)
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]
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]
This study identifies 37 central banks that added China’s Renminbi (RMB) to their reserve portfolio since 2010. Why do some states diversify into new reserve currencies at an early stage while most continue to take a wait-and-see approach? We argue that state preferences regarding international order influence decisions to invest in RMB. While some states support the liberal, U.S.-led status quo, others prefer an emerging Chinese alternative order. We contend that as state preferences for international order move away from the U.S.model (and toward China), the likelihood of diversifying reserves into RMB should increase. Thus, the decision to invest in RMB is not simply an economic choice. It is also a political act that signals and symbolizes a state’s preferences for a diminution of American global influence and support for a revised order. Employing new United Nations General Assembly (UNGA) ideal points data, we find that states with larger (smaller) ideal point distance with the U.S. (China) are more likely to adopt RMB as a reserve currency. Furthermore, such political considerations rather than economic concerns about transaction needs, optimal portfolio considerations, and instrumental calculations best explain emergent demand for the RMB as a reserve currency.
- Redback Rising: China’s Bilateral Swap Agreements and Renminbi Internationalization. (with Steven Liao) International Studies Quarterly (2015) [replication data]
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)
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.
International organizations (IOs) often face questions of legitimacy due to decision-making structures that heavily weight the voices of developed countries. This paper examines whether “descriptive representation”—the degree to which representatives share characteristics of the represented—shapes public opinion toward IOs. We focus on the case of the International Monetary Fund (IMF) which often faces criticism for its weighted voting system. We surmise that information about IMF governance reforms that expand representation of developing countries will increase support for engagement with the institution. Furthermore, we expect this shift to operate through two mechanisms: improving perceptions of “procedural legitimacy”, the belief that the IMF treats borrower fairly; and enhancing perceptions of “substantive legitimacy”, the expectation that borrowing countries will receive favorable terms. Analysis of survey experiments fielded in three countries—Argentina, China and Turkey—largely support our conjectures. In each case, respondents who were informed that developing countries have more influence at the Fund are more likely to support working with the IMF compared to those who were told that wealthy countries have more say. We find that this increase in support works by enhancing perceptions of procedural legitimacy. We find only very limited support that substantive legitimacy plays a role.
When do international reputational concerns constrain governments’ economic policy choices? We assess this question by analyzing decisions to tighten restrictions on capital outflows among a group of emerging markets. While policymakers should be more likely to tighten restrictions to protect their economies as capital flow volatility (CFV) increases, financial markets also view outflow controls with derision as they violate norms of capital freedom and property rights protection. We argue that the effect of CFV on outflow controls should be contingent on the use of capital controls in peer markets. When market peers are open, governments should anticipate that the use of outflow controls will come at high cost to their market reputations as norm violators stand out from a crowd of liberal substitutes. Conversely, when peer markets are closed and noncompliant with market norms, the use of outflow controls should be far less costly to an economy’s reputation. Focusing on 25 emerging markets from 1995 to 2015, we show that CFV is associated with outflow controls, but only when market peers are already closed. Our results suggest that reputational concerns and attendant fears of market punishment constrain economic policy choices.
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.
- Splitting the Winnings (and Losses): Relative versus Absolute Gains Considerations and Trade Attitudes (with Shana Kushner Gadarian)
Recent work on Americans’ trade attitudes has shown that voters’ views toward trade are tightly linked to their beliefs about whether trade is good for the United States economy as a whole. However, there are two ways to think about “winning” when it comes to trade. On one hand, a country can win maximizing absolute gains: getting as many material benefits for itself as possible regardless of how much its trading partners benefit. On the other hand, a country can win by maximizing relative gains: making sure that it obtains a larger benefit than its trading partners. We use a survey experiment to test whether two characteristics of the trading country (its security relationship to the US and its cultural similarity to the US) shape whether American citizens prefer trade relationships that confer absolute or relative benefits. Our results indicate that US cultural distance from a trade partner does not impact relative gains thinking. However, when considering trade relations with adversaries, we find that Americans are more likely to prefer outcomes where US relative gains are maximized, even if this brings about a suboptimal outcome in absolute terms. In addition, we find that these results are strongly conditioned on partisanship and collective narcissism.
Compared to most other major economies, China maintains stringent restrictions on international flows of money and financial assets. This paper examines why capital controls continue to receive strong political support in China. We argue that the global policy context influences preferences for capital controls within China. Policy entrepreneurs that favor capital controls often point to the resurgent use of capital controls in other countries as evidence of their desirability. This issue framing strategy, in turn, shifts preferences in favor of capital controls. We present qualitative evidence showing that these international policy trends feature heavily in domestic political debates about capital controls in China. Next, using original survey data, we show that these widely used elite frames are effective at increasing mass public support for capital controls in China. Survey respondents that were informed that capital controls have become increasingly common abroad were substantially more supportive of capital controls than other individuals. The evidence indicates that growing global use of capital controls can strengthen public support for this policy. More broadly, our analysis indicates that theories of policy diffusion should better incorporate domestic politics and the role of policy entrepreneurs to present a more accurate model of how policies spread internationally.