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International Aspects of Central Banking: Diplomacy and Coordination
Abstract
In this paper, we discuss the evolution of central bank interactions since the early 1970s following the breakdown of the managed exchange-rate system that was negotiated at Bretton Woods. We review the most important forums or organizations through which central banks have engaged in diplomacy. We then discuss the mobilization of coordination through diplomacy using three examples over the past 30 years: the Plaza Accord in 1985 negotiated by the G-5; the response to the Asian financial crisis in 1997-98, led by the International Monetary Fund (IMF) with heavy participation from G-7 finance ministries and central banks; and the response to the global financial crisis that began in 2007. For each of these examples, we provide the economic circumstances at the time, discuss how the response was mobilized, and evaluate its success. Our main conclusion is that the relationship-building that is inherent in multilateral interaction has provided a springboard for coordination in times of stress or crisis. Moreover, crises matter in that they can be turning points in terms of the actions taken and the countries included in the dialogue; thus, the groupings themselves are to some extent endogenous to events. Finally, we use the lens of diplomacy and coordination to trace out the path for central bank diplomacy going forward.
... In the run up to and in the aftermath of the global financial crisis, in which the Lehman Brothers failure and accompanying events is commonly seen as its apex, in the European Monetary and Economics Union . 6 Kahn;Meade (2016): p. 28. 7 Li;Zhang (2017): p. 56. back refinancing" 8 institution for interbank markets and illiquid but solvent MFIs in times of USD liquidity shortages, particularly avoiding a deeply impacting spillover of distress in foreign money markets into US based MFIs. ...
... In the run up to and in the aftermath of the global financial crisis, in which the Lehman Brothers failure and accompanying events is commonly seen as its apex, in the European Monetary and Economics Union . 6 Kahn;Meade (2016): p. 28. 7 Li;Zhang (2017): p. 56. back refinancing" 8 institution for interbank markets and illiquid but solvent MFIs in times of USD liquidity shortages, particularly avoiding a deeply impacting spillover of distress in foreign money markets into US based MFIs. ...
This paper is focused on the following two research questions:
(1) In which manner are Central Bank Currency Swaps (CBCS) to be defined and embedded in regard of basic economic and legal issues?
(2) What are the effects of the provision of USD liquidity onto the balance sheets of the Federal Reserve System (FRS) and the European Central Bank (ECB) (in embedment into the corresponding CBCS frame work)?
The purpose of this paper does not lie in a mere descriptive illustration of CBCS, but in a synopsis of theoretical and empirical aspects.
The thesis of this paper can be summarized as follows: CBCS are an appropriate instrument to handle liquidity shortages in the short run. Regarding international monetary relations in the context of the International Monetary System (IMS) and other measures of the so called ‘global safety net’, there are also implications pointing to possible negative consequences in the medium-to-long-term.
... It follows from this that international policy coordination in this situation should not be interpreted as an issue regarding exclusively monetary policy, along the normalisation path of higher interest rates, but it should refer to the entire set of policy instruments within and across countries. As well explained by Kahn and Meade (2016), all previous important episodes of policy coordination have included differentiated actions of fiscal authorities and monetary policymakers in the countries 15 The ECB Governing Council acknowledged the existence of such distributional issues among workers and firms due to the terms-of-trade loss, but it aseptically noted that it would take time before the income losses shock were fully absorbed. PE 733.993 ...
This is a very first exploration of the central bank climate debate from a perspective chiefly of Global Administrative Law (GAL). Drawing from GAL here allows to integrate novel conceptual tools for navigating, framing, and evaluating the manifold challenges for central banks who adapt their operational frameworks in accordance with climate considerations. Over and above adding some analytical clarity and normative guidance, this contribution maps the potential for further and more in-depth investigations and interventions into the field of central banking through a prism of GAL. The occasion as well as the primary object of this exploratory study is the Network for Greening the Financial System (NGFS) and its best practices, insofar as these encourage central banks to include climate change-related considerations into their monetary policy operational frameworks. Accommodating NGFS best practices could be conceived as an effort of central banks to avoid their own unjustified “regulatory disregard” of a “common concern of humankind”. As proactive as the NGFS may occur, the most consistent and most judicious way to understand the network may be as a “building block” (“linkage”) for a polycentric regime of global climate protection.KeywordsClimate changeCentral banksNGFSGlobal Administrative LawDisregardCommon concern of humankindBuilding blocksLinkageLiquid authorityFinancial stability
We are now in the era of the G8, although the G7 still exists as a grouping for Finance Ministers. Why do G7 finance ministries and central banks co-operate? What are the implications of this co-operation for US power and the abilities of the other six states to exercise leadership? What role do the G7 play in global financial governance? How much authority do they possess and how is that authority exercised? This is the first major monograph on the political economy of G7 finance ministry and central bank co-operation. It argues that to understand the contribution of the G7 to global financial governance it is necessary to locate the process in the context of a wider world financial order comprised of decentralized globalization. It also provides original case study material on the G7's contribution to macroeconomic governance and to debates on the global financial architecture over the last decade. It assesses the G7's role in producing a system of global financial governance based on market supremacy and technocratic transgovernmental consensus and articulates normative criticisms of the G7's exclusivity. For researchers in the fields of IR/IPE generally, postgraduate students in the field of international organization and global governance, policy makers and financial journalists this is the most extensive analysis of the G7 and the political economy of global financial governance to date.
This book covers the history of the Bank for International Settlements (BIS), the first-born among the international economic institutions, from its founding in Basel in 1930 to the end of the Bretton Woods system in 1973. The first chapters explore the foundation of the BIS, its role in the financial crisis of 1931, the London economic conference of 1933, and in following years when central bank cooperation was mostly reduced to technical matters. Considerable attention is devoted to the much criticized activity of the BIS during World War II. The book then deals with the intensive central bank cooperation from the recreation of Europe’s multilateral payments in the 1950s and for the support of the Bretton Woods system in the 1960s. The last chapter is devoted to the involvement of central banks in the first timid steps towards European monetary unification and to the eurodollar market.
One of the concerns of international political economy in the past several years has been to theorize about the conditions conducive to the development of international cooperation and institutionalization. This article explores the usefulness of economic theories of dynamic contracting, which are essentially functionalist in nature, to understand international financial innovation in the 1920s. It interprets the founding of the Bank for International Settlements as an important effort to overcome the problems of contract enforcement and information asymmetries in international lending that had contributed to capital market inefficiencies as the 1920s drew to a close. Dynamic contracting theories suggest reasons why borrowers and lenders have a strong interest in developing cooperative international institutions that help establish a borrower's credibility. This approach is supplemented with a multilateral bargaining model between debtor, private lenders, and creditor governments to explain international financial innovation during the interwar years. The evidence suggests that the BIS was created primarily to enhance Germany's incentives to repay its debts and that it was part of a deal between private creditors and creditor governments to reduce and commercialize German reparations. By looking not only at interstate bargaining but also at public/private bargaining, it is possible to understand the paradox of cooperative international institutional development in a period otherwise marked by conflict. Government Version of Record
The paper reviews the policy response of major central banks during the 2007-08 financial market turbulence and suggests that there is scope for convergence among central bank operational frameworks through the adoption of those elements that proved most instrumental in calming markets. These include (i) rapid liquidity provision to a broad range of counterparties; (ii) a congruence of collateral policies with market developments; (iii) an ability to increase the average maturity of liquidity provision; and (iv) central bank cooperation to facilitate the use of cross-border collateral. Flexible use of open market operations was needed to avoid the stigma associated with traditional standing facilities, and allowed central banks to maintain at least basic market functioning. Having a flexible framework, however, requires careful consideration of the desirable limits to market intervention.
We examine why international actors—including states, firms, and activists—seek different types of legalized arrangements to solve political and substantive problems. We show how particular forms of legalization provide superior institutional solutions in different circumstances. We begin by examining the baseline advantages of “hard” legalization (that is, precise, legally binding obligations with appropriate third-party delegation). We emphasize, however, that actors often prefer softer forms of legalization (that is, various combinations of reduced precision, less stringent obligation, and weaker delegation). Soft legalization has a number of significant advantages, including that it is easier to achieve, provides strategies for dealing with uncertainty, infringes less on sovereignty, and facilitates compromise among differentiated actors.
Although our approach is largely interest-based, we explicitly incorporate the normative elements that are central in law and in recent international relations theorizing. We also consider the important role of nonstate actors who, along with states, are central participants in contemporary international legalization. We illustrate the advantages of various forms of international legal arrangements with examples drawn from articles in this special issue and elsewhere.
At the height of the global financial and economic crisis of 2008–2009, the Group of Twenty was elevated to country leaders’ level and acknowledged itself as the “premier forum for… international economic cooperation.” This self-acknowledgment reflected the long-felt need to institutionalize the dialogue between the advanced and emerging economies in a more effective setting. However, the ad hoc nature of the G-20 and the extent to which an informal and self-selected club of nations can provide a stable framework for facilitating global cooperation has been questioned. Against this backdrop, the study traces the G-20’s historical evolution, situates the dynamics of its institutional arrangements, and reviews the emerging literature on G-20 reform. Building on this analysis, the study then assesses the expansion of the G-20’s scope to global development and appraises the Group’s evolution in the broader context of the current global governance framework.
The Basel Committee on Banking Supervision (BCBS) sets the guidelines for world-wide regulation of banks. It is the forum for agreeing international regulation on the conduct of banking. Based on special access to the archives of the BCBS and interviews with many of its key players, this book tells the story of the early years of the Committee from its foundation in 1974/5 right through until 1997 – the year that marks the watershed between the Basel I Accord on Capital Adequacy and the start of work on Basel II. In addition, the book covers the Concordat, the Market Risk Amendment, the Core Principles of Banking and all other facets of the work of the BCBS. While the book is primarily a record of the history of the BCBS, it also provides an assessment of its actions and efficacy. It is a major contribution to the historical record on banking supervision.
The Global Financial Crisis and the Eurozone crisis have led to a profound rethink in East Asia about the international monetary system and regional monetary and financial integration. After the Asian financial crisis of 1997-8, deeper regional cooperation was seen as the way to avoid reliance on the IMF and the rest of the world. Steps were taken, but they were limited because of economic diversity among the countries and regional rivalries. Still, integration into the global financial system and Europe-s regional process were seen as objectives to be adapted to East Asia, as detailed in an overview chapter. The global financial crisis has shaken this strategy but also revealed the pre-existing deep disagreements. This book presents a collection of essays by scholars from different countries. Each one was invited to describe the vision of their policymakers. The traditional rivalry between China and Japan, the region-s largest economies, reveals Chinese confidence into its rising power and Japanese growing doubts about its ability to weigh on the debate. In different ways, both display a continued interest into regional cooperation. Korea and the ASEAN countries do not wish to choose between the regional powers but remain attached to regional cooperation and integration. They look for pragmatic solutions that recognize the value-chain characteristic of trade and investment. Additional contributions by US and European scholars provide evaluations of the global and Eurozone crises and of their relevance for East Asian integration.
Japan faces three major policy challenges when promoting intraregional exchange rate stability. First, there must be some convergence of exchange rate regimes in East Asia. Currently no coordination mechanism exists as each economy pursues its own domestic objectives. The most realistic option is to adopt similar managed floating regimes, including in. China. Second, it is in the interest of East Asia to create a regional monetary anchor through a combination of some form of national inflation targeting and a currency basket system. Third, the region must have a countries assuming a leadership role. Japan and China need to collaborate closely with each other for this purpose. Japan needs to restore sustained economic growth through Abenomics, transform Tokyo into a globally competitive international financial center, further strengthen existing initiatives for regional financial cooperation (ERPD, AMRO, CMIM, and Asian bond market development), and launch serious policy discussions focusing on exchange rate issues to achieve intraregional exchange rate stability.
This paper traces the evolution of the Federal Reserve and its engagement with the global economy over the last three decades of the 20th century: 1970 to 2000. The paper examines the Federal Reserve’s role in international economic and financial policy and analysis covering four areas: the emergence and taming of the great inflation, developments in US external accounts, foreign exchange analysis and activities, and external financial crises. It concludes that during this period the US central bank emerged to become the closest the world has to a global central bank.
Until recently, not much attention had been paid to the need to promote regional monetary and financial cooperation. This is surprising as cooperation in finance provides more opportunities for "win-win" situations. However, the pace of monetary and financial cooperation has picked up in the posterisis period. Countries in East Asia appear to have mustered a certain amount of "political will" to propel the process further. Cooperation has ranged from information exchange and surveillance, to establishing regional financing facilities and early warning systems. Beyond the Chiang Mai Initiative, efforts are also under way to coordinate macroeconomic and exchange rate policies mainly under the ASEAN Task Force on ASEAN Currency and Exchange Rate Mechanism of the Asia-Europe Finance Ministers group. As a regional development bank, the Asian Development Bank is supporting the efforts of its developing member countries to strengthen regional monetary and financial cooperation.
The G20 has produced mixed results. After initial high hopes and some success, negotiations within the G20 forum have slowed, progress is less visible and disagreement rather than agreement has come to the fore. Against this background, this paper revisits the basic economic and geopolitical motivations for the G20, in order to review its performance and attempt to draw lessons for the path ahead. The authors conclude that: in todayâ??s global economy (with its trade and financial market integration and its institutional architecture) a â??G20-typeâ?? institution is necessaryâ?? if it didnâ??t exist, it should be created; the G20 had its high noon moment in 2008-09 and some recalibration of expectations was inevitable, but its achievements in 2010-11 have nevertheless been disappointing; to be fair there is, in detailed and technical work, more progress than there seems to be at first sight; from a governance standpoint, the G20 is not an efficient forum; improvements in working methods are urgently needed; more fundamentally, for the G20 to retain its role, its members need to develop a common vision of global economic problems and the way to approach them.
It has been argued that central bank cooperation was important to the working of the gold standard before 1914. This article takes a critical view of the central bank cooperation thesis and, relying on new archival research as well as on secondary sources, offers an alternative picture of central bank relations during the nineteenth century. Central bank cooperation was exceptionally never reciprocal and always failed to institutionalize: scholars seeking to explain the stability of the gold standard will have to look in other directions
Sluggish global growth, frequent currency crises, and huge trade imbalances all reveal the failure of the Group of Seven industrial nations to provide effective leadership of the world economy. The G-7 has played this role in the past and must do so again to assure global prosperity. * Part of the G-7's decline is due to continuing policy differences among the United States, Germany, and Japan. The bigger problem, however, is a new "consensus for inaction" based on fears of trying to counter the huge flows of international private capital, the existence of large budget deficits, and the resistance of central banks to coordination by anyone. * The study offers a comprehensive analysis of all these changes in the world economy and reaches an optimistic reading of the prospects for effective G-7 leadership. It proposes an action program that includes reforming the exchange rate regime, instituting an early warning system to prevent new monetary crises, augmenting the resources of the IMF to deal with private capital flows, and institutional reform of the G-7 itself.
Roughly once a year, the managing director of the International Monetary Fund, the US treasury secretary and in some cases the finance ministers of other G-7 countries will get a call from the finance minister of a large emerging market economy. The emerging market finance minister will indicate that the country is rapidly running out of foreign reserves, that it has lost access to international capital markets and, perhaps, that is has lost the confidence of its own citizens. Without a rescue loan, it will be forced to devalue its currency and default either on its government debt or on loans to the country's banks that the government has guaranteed. This book looks at these situations and the options available to alleviate the problem. It argues for a policy that recognizes that every crisis is different and that different cases need to be handled within a framework that provides consistency and predictability to borrowing countries as well as those who invest in their debt.
Since the financial crisis in the late 1990s, Asian governments have been considering strengthening regional monetary and financial cooperation. Proposals have ranged from the Asian Monetary Fund to common currencies. During the past two years, China, Japan, Korea, and the member-states of ASEAN have established a set of financial facilities under an agreement made in Chiang Mai, Thailand. The Chiang Mai Initiative (CMI) mobilizes a portion of the very large reserve holdings of its members for financial stabilization in a crisis. Organized under the "ASEAN plus three" grouping, these arrangements do not include the United States or other countries outside the region.The CMI thus raises several important questions: Under what terms will financing be extended on a regional basis? Is it likely to stabilize or destabilize international capital flows? What will CMI's relationship be to the International Monetary Fund and other official financial institutions? How should governments build on these arrangements in the future? Could they provide the basis for broader integration of the East Asian region?This study examines the case for and against regional financial arrangements in East Asia, describes the CMI, compares it to financial arrangements in other regions, and recommends how the Initiative can preserve its complementarity to multilateral institutions and be strengthened in the future. The study specifically addresses the concerns of Americans, Europeans, and multilateral organizations, assessing the pros and cons of such regional financial arrangements for the global system.
The turmoil that rocked Asian markets after the middle of 1997 and that spread far afield was the third major currency crisis of the 1990s. Thailand, Indonesia, Malaysia, and South Korea suffered outright recessions in 1998. In an effort to contain the crisis, almost $120 billion was pledged in IMF-led official rescue packages. * How could this happen to a group of countries that has been so highly regarded in the 1990's by private international capital markets? How could the crisis be overcome, and what changes are necessary to prevent it from happening again? Morris Goldstein provides the answers to these questions by first explaining how the Asian financial crisis arose and spread. He traces the crisis through its three interrelated origins: financial sector weaknesses; external sector problems; and the contagion that spread from Thailand to other countries. Goldstein then outlines what needed to be done in the ASEAN-4 economies, in Japan and China, and in the design of IMF-led official rescue packages to end the crisis. Goldstein's final remarks offer specific proposals for improving the international financial architecture.
The financial crisis that began in August 2007 disrupted U.S. dollar funding markets not only in the United States but also overseas. To address funding pressures internationally, the Federal Reserve introduced a system of reciprocal currency arrangements, or "swap lines," with other central banks. The swap line program, which ended early this year, enhanced the ability of these central banks to provide U.S. dollar funding to financial institutions in their jurisdictions.
The financial crisis that began in August 2007 has blurred the sharp distinction between monetary and financial stability. It has also led to a revival of practical central bank co-operation. This paper explains how things have changed. The main innovation in central bank cooperation during this crisis was the emergency provision of international liquidity through bilateral central bank swap facilities, which have evolved to form interconnected swap networks. We discuss the reasons for establishing swap facilities, relate the probability of a country receiving a swap line in a currency to a measure of currency-specific liquidity shortages based on the BIS international banking statistics, and find a significant relationship in the case of the US dollar, the euro, the yen and the Swiss franc. We also discuss the role and effectiveness of swap lines in relieving currency-specific liquidity shortages, the risks that central banks run in extending swap lines and the limitations to their utility in relieving liquidity pressures. We conclude that the credit crisis is likely to have a lasting effect on the international liquidity policies of governments and central banks.
It is well-known that if international linkages are relatively small, the potential gains to international monetary policy
coordination are typically quite limited. But when goods and financial markets are tightly linked, is it problematic if countries
unilaterally design their monetary policy rules? Are the stabilization gains from having separate currencies largely squandered
in the absence of effective international monetary coordination? We argue that under plausible assumptions the answer is no.
Unless risk aversion is very high, lack of coordination in rule setting is a second-order problem compared with the overall
gains from macroeconomic stabilization.
In recent years, a number of industrialized countries have adopted a strategy for monetary policy known as 'inflation targeting.' The authors describe how this approach has been implemented in practice and argue that it is best understood as a broad framework for policy, which allows the central bank 'constrained discretion,' rather than as an ironclad policy rule in the Friedman sense. They discuss the potential of the inflation-targeting approach for making monetary policy more coherent and transparent and for increasing monetary policy discipline. The authors' final section addresses some additional practical issues raised by this approach. Copyright 1997 by American Economic Association.
This paper examines the political dynamics surrounding the Japanese government’s initial proposal for the creation of an Asian Monetary Fund (AMF) in 1997 and the arrangements that have emerged in its place. Specifically, the paper delves into why Japan attempted to embark on regional institution building independent of the United States and the International Monetary Fund (IMF) in 1997 but has since supported the close linkage to the IMF of a network of bilateral currency swap arrangements in the region. The findings reveal the formidable difficulties Japan faces in circumventing the activities of US-dominated multilateral institutions to play a greater leadership role in financial crisis management in Asia.
I am not opposed to international cooperation in all economic matters, but in this lecture, I stress the counterproductive consequences of the international coordination of macroeconomic policy. I believe that many of the claimed advantages of cooperation and coordination are wrong, that there are substantial risks and disadvantages to the types of coordination that are envisioned, and that an emphasis on international coordination can distract attention from the necessary changes in domestic policy. Moreover, the attempt to pursue coordination in a wide range of macroeconomic policies is likely to result in disagreements and disappointments that reduce the prospects for cooperation in those more limited areas of trade, defense, and foreign assistance where international cooperation is actually necessary. In stressing the limited scope for the international coordination of macroeconomic policy and exchange rates, I do not wish to imply that such action is never appropriate. There are some small and very interdependent countries where such coordination should undoubtedly be the general rule. There are also some conditions when the potential gains from coordination are such that all countries could expect to benefit from participation. But the active coordination of the macroeconomic policies and of exchange rates among the United States, Japan, and Germany will generally be inappropriate. Moreover, as I shall explain in these remarks, the United States is particularly unsuited to participate in an ongoing process of economic coordination.
This paper reviews 80 years of cooperation among central banks. Diverse modes of collaboration are identified, ranging from simple exchange of relevant information to mutual financial support and coordination of monetary actions. Central bank cooperation got off to a rocky start in the 1930s, following the creation of the Bank for International Settlements in 1930, but it improved in the 1950s and especially in the 1960s. Most early cooperation was among European central banks, although need for a trans-Atlantic dimension was soon evident. By the end of the 20th century both the problems addressed and the participants were drawn from around the world. The alleged dangers of central bank cooperation are found to have been exaggerated.
With the insight of 130 years of history, this paper tries to answer three questions: how did changing international monetary and financial conditions shape the targets and tools of central bank cooperation? What factors influenced its intensity? Did a structured organisation, such as the BIS, make a difference to its effectiveness? We show that while central bank cooperation through history was ultimately directed to ensuring monetary and financial stability, the conception of these objectives, the relationship between the two, the balance in their pursuit, and the strategies followed evolved over time reflecting changes in the monetary and financial environment as well as in the intellectual climate. In turn, the intensity of central bank cooperation was influenced by the state of international relations, the prestige and degree of autonomy of central banks and the technical nature of the issues requiring cooperation. We also argue that the BIS made a material difference, at least when conditions allowed.
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The Plaza Accord 30 Years Later International Monetary Cooperation: Lessons from the Plaza Accord After Thirty Years
- Jeffrey A Frankel
Frankel, Jeffrey A. (2016), " The Plaza Accord 30 Years Later, " in C. Fred Bergsten and Russell
A. Green, International Monetary Cooperation: Lessons from the Plaza Accord After
Thirty Years, Washington D.C.: Peterson Institute for International Economics.
G-10, G-20, and Others
- Andrew Gerard Baker
- Caprio Jr
- Thorsten Beck
- Charles W Calomiris
- Takeo Hoshi
Baker, Andrew (2013), " Groups: G-5, G-7/8, G-10, G-20, and Others, " in Gerard Caprio Jr.,
Thorsten Beck, Charles W. Calomiris, Takeo Hoshi, Peter J. Montiel, and Garry J.
Schinasi (eds.), Handbook of Safeguarding Global Financial Stability: Political, Social,
Cultural, and Economic Theories and Models, London: Elsevier.
Inside the Risky Bets of Central Banks
- Jon Hilsenrath
- Brian Blackstone
Hilsenrath, Jon and Brian Blackstone (2012), "Inside the Risky Bets of Central Banks," Wall
Street Journal, December 12.
The Plaza Accord: Exchange Rates and Policy Coordination International Monetary Cooperation: Lessons from the Plaza Accord After Thirty Years
- Edwin M Truman
Truman, Edwin M. (2016b), " The Plaza Accord: Exchange Rates and Policy Coordination, " in
C. Fred Bergsten and Russell A. Green, International Monetary Cooperation: Lessons
from the Plaza Accord After Thirty Years, Washington D.C.: Peterson Institute for
International Economics.