## _wp1497

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---

### I. INTRODUCTION
- Uses the 2007/08 crisis and subsequent policy responses as a "natural experiment" to examine policy cooperation in the real world.
- Methodology: "revealed preference" and historical approach—observing actual policy behavior to infer preferences, contrasted with model-based welfare-maximization literature.
- Cooperation definition (Oxford English Dictionary): "the process of working together to the same end", implying:
  - Willingness of policy makers to take account of spillovers to others when setting policies.
  - Need for active dialogue.
- Distinction: "cooperation" vs. "policy coordination" (organization of elements to work together effectively).
  - Author adopts "cooperation" because few institutions accept external constraints implied by coordination; coordination arrangements may conflict with institutional mandates.
  - Note: some policies (e.g., raising the IMF’s lending capacity) would also qualify as policy coordination.
- Paper structure:
  - Broad institutional setting.
  - Examination of G-20 policy areas: liquidity, monetary, fiscal, financial, trade, and the policy mix (G-20 mutual assessment process).
  - Domestic policy cooperation.
  - Conclusions with lessons to enhance policy cooperation.

### II. THE INSTITUTIONAL SETTING
- Post-crisis shift in international policymaking:
  - Macroeconomic and many structural policies moved decision-making from smaller high-income groups (G-7, Financial Stability Forum) to wider groups (G-20, Financial Stability Board) with more diverse views.
    - Membership broadened but informal consensus-based approaches avoiding enforcement procedures persisted.
  - Trade and bank capital governance were more inclusive from inception (WTO; Basel Committee on Banking Supervision plus Basel Consultative Group).
    - WTO: more organized coordination via a legal framework.
    - Basel Committee: directives on policy changes; smaller membership suited to countries with internationally active banks.
  - Interpretation: wide membership and organized coordination signal stronger international consensus on trade (and to some extent bank capital) than for macroeconomic policies.
- Rise of the G-20:
  - Washington leaders' meeting, November 2008: communiqué with an action plan on short-term policy support and financial market reform; discussed resisting protectionism and achieving stronger growth.
  - Leaders’ communiqué assessed inconsistent and insufficiently coordinated macroeconomic policies and inadequate structural reforms as factors to the crisis; called for "closer macroeconomic cooperation" to restore growth and avoid negative spillovers.
  - London summit, April 2009: deepened trade and growth discussions under "Resisting Protectionism and Promoting Global Trade and Investment" and "Ensuring a Fair and Sustainable Recovery for All".
  - Action plan covered:
    - Short-term macroeconomic support (liquidity, monetary, fiscal).
    - Structural reforms (financial sector regulation, trade, structural policies).

### III. SHORT-TERM MACROECONOMIC SUPPORT
- Three types of post-crisis macro support:
  - Liquidity support to stabilize markets in the immediate aftermath.
  - Monetary policies to support demand: conventional (policy rate cuts) and unconventional (asset purchases and forward guidance).
  - Fiscal policies.
- Outcomes for international policy cooperation:
  - Significant changes in liquidity management.
  - Limited cooperation outside of the immediate crisis for monetary and fiscal policies.

#### Liquidity Support — Reciprocal central bank swap lines and IMF resource expansion
- Swap line timeline and expansions:
  - Swap lines between the Fed and the European Central Bank and the Swiss National Banks initiated on 12 December 2007.
  - After Lehman on September 15, 2008:
    - Three days later existing lines expanded and new swap lines initiated with the Bank of Canada, Bank of England, and Bank of Japan.
    - Six days later (September 24) Fed program extended to include central banks of Australia, Sweden, Norway, and Denmark.
    - Mid-October: caps on swap arrangements lifted, allowing unlimited borrowing by four of the five "core" central banks (European Central Bank, Bank of Japan, Bank of England, and Swiss National Bank).
    - Late October: further Fed swap lines initiated with Brazil, Mexico, Korea, Singapore, and New Zealand.
- Initial expiry and subsequent status:
  - Initially supposed to end on April 30, 2009; extended twice and terminated on February 1, 2010.
  - Reintroduced on May 9, 2010 with "core" central banks.
  - Made into standing arrangements "until further notice" as a "prudent liquidity backstop" in October 2013.
- Practical operation and tensions:
  - Theoretically reciprocal, but in practice the Fed loaned dollars to most other central banks (exceptions: Brazil, New Zealand, Singapore) and never borrowed foreign currency.
  - Reflected dominant position of dollar markets in the international financial system.
  - Swap lines created tensions with countries not included; the Fed did not provide details on recipient selection.
- IMF lending capacity expansions:
  - Washington G20, November 2008: agreement that Fund resources needed augmentation.
  - London summit, April 2009: goal of tripling Fund lending capacity from $250b to $750b.
  - Pittsburgh summit, November 2009: permanent increase achieved through bilateral pledges folded into the New Agreement to Borrow.
  - US Congress failure to pass US quota increase by early 2014 delayed quota-based reforms.
  - Spring 2012 IMFC: additional bilateral pledges of $461b (pledges generally lasted 2–4 years).
- Legacy: expansion in available liquidity via swap lines and expanded Fund resources seen as enduring cooperation outcomes.

#### Monetary policy: coordination, unconventional tools, and spillovers
- Early coordinated rate moves:
  - Initial interest rate cuts concentrated in North America.
  - October 8, 2008: concerted ½ percentage point cut in policy rates by the Fed, ECB, Bank of England, Bank of Canada, and Sweden’s Riksbank; Swiss National Bank also lowered its benchmark rate; Bank of Japan endorsed the move.
  - Peoples Bank of China cut a key interest rate and lowered reserve requirements.
- Limits and divergence:
  - Within months the Fed’s policy rate effectively reached zero, precluding further coordinated rate cuts.
  - Fed unconventional policies:
    - Announcements of Fed purchases of MBS in November 2008.
    - Forward guidance on policy rate path announced in December 2008.
    - Purchases of Treasury bonds announced in March (following month).
  - Other central banks followed:
    - Bank of England initiated asset purchases in March 2009.
    - Bank of Japan announced forward guidance and asset purchases in 2010.
    - European Central Bank implemented its Securities Market Program later in 2010.
- Domestic focus and limited international coordination:
  - Press releases initiating unconventional policies focused on domestic conditions; Federal Reserve statement had no mention of the rest of the world.
  - Little evidence of cooperation later: three major monetary expansions in fall/winter 2012/13 (ECB Open Market Transactions Aug/early Sept; Fed QE3 mid-Sept; BOJ new 2 percent inflation target Jan 2013) had releases devoid of a global view.
- Spillovers and emerging markets:
  - Unconventional policies associated with major capital flows into emerging markets.
  - In 2012/early 2013 emerging markets complained of a "wall of money" appreciating exchange rates; concerns elicited no source-country central bank response.
  - Market reversal and volatility started after the May 22, 2013 discussion of tapering by Chairman Bernanke.
- G-20 response and communication:
  - September 5–6, 2013 G-20 St. Petersburg communiqué recognized spillovers and included commitments on careful calibration and clear communication.
  - February 22–23 Sydney communiqué emphasized consistent communication and cooperation on managing spillovers and global safety nets.

#### Fiscal policy: coordinated stimulus, subsequent consolidation, and EU reform
- Immediate coordinated fiscal response:
  - G-20 Washington leaders’ summit, November 15, 2008: called to "use fiscal measures to stimulate demand to rapid effect, as appropriate, while maintaining a policy framework conducive to fiscal sustainability."
  - IMF Managing Director advocated a global fiscal stimulus of 2 percent of world GDP and argued fiscal multiplier around one.
  - Fund analysis: stimulus measures pledged of the order of 1¼–2 percent of (weighted) G20 GDP in 2009 and 1½ percent in 2010.
- Major country stimulus pledges:
  - United States: promised stimulus of 2 and 3 percent of GDP in 2009 and 2010, respectively.
  - China: 2 percent in both years.
  - Germany: 1½ and 2 percent.
  - Japan: almost 2 percent of GDP over two years.
- Outcomes:
  - G-20 advanced economies estimated to have boosted cyclically adjusted deficits by 2½ percent of GDP in 2009 and a further ½ percent in 2010.
  - Emerging markets provided stimulus of 2¼ percent of GDP in 2009 then withdrew almost a percentage point in 2010.
- Shift toward consolidation:
  - Toronto summit, June 2010: leaders pledged fiscal plans to at least halve budget deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016.
  - Sluggish growth and the European crisis made these plans more challenging; risk that 2013 goal could be missed by several countries (United States likely achieved its 2013 target; Japan likely missed its one).
- Europe:
  - Tension between achieving nominal deficits below 3 percent of GDP and growth concerns.
  - Outcomes: greater leeway for countries to determine fiscal paths; progress on fiscal surveillance via Fiscal Compact, Six Pack, and Two Pack.

### IV. FINANCIAL SECTOR REFORM: PRINCIPLES, COMPROMISES, AND FRAGMENTATION
- G-20 financial reform priorities:
  - Strengthen transparency and accountability; enhance sound regulation; promote market integrity; reinforce international cooperation; reform international financial institutions.
  - Specific objectives: tighter regulation of credit rating agencies; expanded Financial Stability Forum membership; better risk modeling; mandatory World Bank/Fund Financial Sector Assessment Programs for major economies; greater disclosure of complex instruments.
- Basel and capital regulation:
  - Basel 2 flaws:
    - Capital dilution: complex definitions diluted loss-absorbing capital.
    - Risk dilution: internal models used to minimize risk-weighted assets.
    - Fragmentation: US did not implement Basel 2; US commercial banks faced a "simple leverage ratio" regime.
  - New proposals: Basel 2.5 and Basel 3 (Basel Committee, 2011 and 2013) include tighter capital definition, augmenting risk-weighted ratio with a simple leverage ratio, a liquidity coverage ratio, and capital surcharges for large banks.
  - Implementation issues:
    - Core standards watered down (e.g., liquidity ratio weakened), partly implemented or delayed (Basel 3 not going into effect until 2018), and sometimes ignored (EU deliberations on leverage ratio).
    - Country-specific initiatives (Dodd-Frank, Vickers, Liikanen) risk regulatory fragmentation.
    - US plan to impose a simple leverage ratio of 6 percent on major commercial banks may create a different practical regime for US banks.
- Crisis management and resolution:
  - "Key Attributes of Effective Resolution Regimes" provides a blueprint, but implementation slow and uneven.
  - Cross-border resolution lagging; "Single Point of Entry" proposals between US, UK, Switzerland hold promise.
- Other issues:
  - Progress on banking secrecy improved (e.g., Switzerland).
  - Move to exchange-traded derivatives slower than anticipated; more derivatives traded over the counter; centralized exchanges risk creating new "too big to fail" institutions.

### V. TRADE AND THE G-20 POLICY MIX
- Trade protectionism commitments:
  - London Summit, April 2009: leaders committed to "refrain from raising new barriers to investment or trade... imposing new export restrictions... or implementing WTO inconsistent measures to stimulate exports" until end-2010.
  - Pledged $250b in additional trade credit and asked regulators to use "available flexibility" in capital requirements for trade finance.
  - Pledge extensions continued; current end date is end-2016.
- Outcomes:
  - Restrictions still cover less than 4 percent of G-20 imports.
  - Econometric models predicted a much larger jump in protectionism, indicating the pledge largely worked.
  - WTO legal framework and institutional arrangements helped deter large-scale protectionism.
- G-20 Mutual Assessment Process (MAP):
  - Pittsburgh summit, September 2009: introduced a "Framework for Strong, Sustainable and Balanced Growth" and MAP to assess policy consistency with balanced growth.
  - MAP intended to use Fund analysis to internalize strategic interactions and use peer pressure to overcome domestic political obstacles.
  - MAP weaknesses:
    - Splintered objectives (strong, sustainable, balanced growth parsed into three objectives) diluted accountability.
    - Distrust, especially as MAP focused on external imbalances and identified countries with internal imbalances.
    - Distractions from reintensified European crisis.
  - Result: countries generally submitted policies they already planned; limited genuine cooperation.
- External imbalances:
  - Fell dramatically, but Fund assessment (2013 Pilot External Sector Report) found little of the fall attributable to policies or policy cooperation.

### VI. DOMESTIC POLICY COOPERATION AND INSTITUTIONAL SUGGESTIONS
- Little change in domestic monetary-fiscal cooperation post-crisis; independent central banks remained the norm.
- Central banks typically avoid public discussion of optimal policy mix to avoid political interference; independence ≠ policy separation.
- Regulatory coordination:
  - Progress differs by country; domestic financial regulatory coordination often addressed by creating high-level coordinating groups.
- Institutional proposals:
  - Create high-level committees (ideally independent agencies) to coordinate overall macroeconomic and structural policy mix.
  - Conduct regular "war games" on insolvency of major international banks involving Treasuries as well as regulators.

### VII. CONCLUSIONS AND POLICY RECOMMENDATIONS
- Three broad conclusions:
  - Cooperation is driven more by fears of bad outcomes than desires for better ones; cooperation peaks around crises.
  - Cooperation is most effective where lack of cooperation is clearly destructive and where institutional frameworks provide enforcement or clear processes (trade/WTO example).
  - Disagreements about policy spillovers and impacts across countries hinder cooperation; examples include debates over fiscal consolidation and unconventional monetary policy.
- Three-fold agenda for economists to promote effective cooperation:
  - Focus on potential costs from bad policies rather than marginal gains from good ones; "connect the dots" to show how non-cooperative policies can cascade into very bad global outcomes.
  - Suggest better institutional arrangements that are enforceable or clear; examples include high-level domestic coordination committees and regular insolvency war games.
  - Build consensus on the impact of policies within and across countries; further work on international interconnectedness and convincing policymakers of large costs from failures of cooperation.
- Final observation:
  - Cooperation peaked in crisis; succeeded where enforcement or clear institutions existed (trade); floundered where goals were fuzzy and enforcement weak (MAP).
  - Urges moving beyond linear game-theory models to focus on avoiding catastrophic outcomes.

*Source: _wp1497 — introduction and references from the IMF working paper.*

### References .............................................................................................................

### _wp1497 - References .............................................................................................................

### I. INTRODUCTION
- The paper uses the 2007/08 crisis and subsequent policy responses as a "natural experiment" to examine policy cooperation in the real world.
- Emphasis on a "revealed preference" and historical approach: observing actual policy behavior to infer preferences, contrasted with the literature's model-based welfare-maximization approach.
- Cooperation defined via the Oxford English Dictionary as "the process of working together to the same end", which implies:
  - Willingness of policy makers to take account of spillovers to others when setting policies.
  - Need for active dialogue.
- Distinction drawn between "cooperation" and "policy coordination" (the latter defined as "the organization of the different elements of a complex body or activity so as to enable them to work together effectively"):
  - The author adopts the less intrusive word "cooperation" for two reasons:
    - Few policy institutions are likely to accept external constraints implied by "the organization of the different elements."
    - Such arrangements may conflict with institutional mandates that involve fairly narrow goals.
  - Note: some policies discussed (for example, raising the IMF’s lending capacity) would also qualify as policy coordination.
- Paper structure outlined:
  - Brief discussion of the broad institutional setting.
  - Examination of experience with policy areas discussed in the G-20: liquidity, monetary, fiscal, financial, trade, and the policy mix (the G-20 mutual assessment process).
  - Brief discussion on domestic policy cooperation.
  - Concluding section draws lessons on enhancing policy cooperation.

### II. THE INSTITUTIONAL SETTING
- Crisis shifted the international environment for policymaking, with a division between:
  - Macroeconomic and many structural policies (monetary policy, financial regulation, fiscal policy, structural reforms): decision-making moved from smaller groups of high income countries (e.g., the G-7 and the Financial Stability Forum) to wider groups with more diverse views (e.g., the G-20 and the Financial Stability Board).
    - While membership broadened, informal consensus-based approaches avoiding well defined enforcement procedures persisted.
  - Areas like trade and bank capital: initial institutional arrangements were much more inclusive from inception (World Trade Organization and the Basel Committee on Banking Supervision plus Basel Consultative Group).
    - The WTO had a more organized coordination procedure through a legal framework.
    - The Basel Committee provided directives on policy changes but had a smaller membership, appropriate to the smaller set of countries with internationally active banks.
    - A wide membership and better organized coordination signal a stronger international consensus on consistent and stable trade relations (and to some extent bank capital regulations) than for macroeconomic policies, which are seen as more a domestic responsibility.
- The rise of the G-20 as an organizing principle:
  - Initial G-20 leaders' meeting in Washington in November 2008 produced a communiqué with an action plan on short-term policy support and reform of financial markets, and discussion on resisting trade and financial protectionism and achieving stronger growth.
  - The leaders’ communiqué assessed that “Major underlying factors to the current situation were, amongst others, inconsistent and insufficiently coordinated macroeconomic policies, inadequate structural reforms, which led to unsustainable global macroeconomic outcomes” and stated that “A broader policy response is needed, based on closer macroeconomic cooperation, to restore growth, avoid negative spillovers and support emerging market economies and developing countries.” (emphasis added).
  - The agenda was updated and broadened in subsequent leaders summits.
  - Next G-20 leaders’ summit in London in April 2009 deepened trade and growth discussions under headings “Resisting Protectionism and Promoting Global Trade and Investment” and “Ensuring a Fair and Sustainable Recovery for All”.
  - With these additions, the action plan covered two broad areas:
    - Short-term macroeconomic support (liquidity, monetary, and fiscal policies).
    - Structural reforms (financial sector regulation, trade, and structural policies).

### III. SHORT-TERM MACROECONOMIC SUPPORT
- Post-crisis macro support divided into three types:
  - Liquidity support to stabilize markets, most notably in the immediate aftermath of the crisis.
  - Monetary policies to support demand: conventional (via policy rate cuts) and unconventional (via asset purchases and forward guidance).
  - Fiscal policies.
- Outcomes for international policy cooperation:
  - Significant changes in liquidity management.
  - Limited cooperation outside of the immediate crisis for monetary and fiscal policies.

#### A. Liquidity Support
- Identified as one of the most visible areas of international cooperation (section header; detailed examples and analysis beyond the header are not included in the supplied content).

*Source: _wp1497 - References .............................................................................................................*

### introduction of reciprocal swap lines across the major central banks (discussed in Fleming

### _wp1497 - introduction of reciprocal swap lines across the major central banks (discussed in Fleming

### Reciprocal central bank swap lines and IMF resource expansion
- Swap lines between the Fed and the European Central Bank and the Swiss National Banks were initiated in 12 December 2007.
- Swap lines were expanded after Lehman on September 15, 2008:
  - Three days later existing lines were expanded and new swap lines initiated with the Bank of Canada, Bank of England, and Bank of Japan.
  - Six days later (September 24) the Fed program was extended to include the central banks of Australia, Sweden, Norway, and Denmark.
  - In mid-October, caps on swap arrangements were lifted, allowing unlimited borrowing by four of the five “core” central banks (European Central Bank, Bank of Japan, Bank of England, and Swiss National Bank).
  - In late October, further Fed swap lines were initiated with Brazil, Mexico, Korea, Singapore, and New Zealand.
- Initial expiry and extensions:
  - Initially supposed to end on April 30, 2009; extended twice and terminated on February 1, 2010.
  - Reintroduced on May 9, 2010 with “core” central banks.
  - Made into standing arrangements “until further notice” as a “prudent liquidity backstop” in October 2013.
- Practical operation and tensions:
  - While theoretically reciprocal, in practice the Fed loaned dollars to most other central banks (exceptions: Brazil, New Zealand, Singapore) and never borrowed foreign currency.
  - This reflected the dominant position of dollar markets in the international financial system.
  - Swap lines created tensions with countries not included; the Fed did not provide details on recipient selection.
- IMF lending capacity:
  - Washington G20, November 2008: agreement that Fund resources needed augmentation.
  - London summit, April 2009: goal of tripling Fund lending capacity from $250b to $750b.
  - Pittsburgh summit, November 2009: permanent increase achieved through bilateral pledges folded into the New Agreement to Borrow.
  - US Congress failure to pass US quota increase by early 2014 delayed quota-based reforms.
  - Spring 2012 IMFC: additional bilateral pledges of $461b (pledges generally lasted 2–4 years).
- Legacy: Expansion in available liquidity via swap lines and expanded Fund resources seen as enduring cooperation outcomes.

### Monetary policy: coordination, unconventional tools, and spillovers
- Early crisis interest rate moves:
  - Initial interest rate cuts concentrated in North America.
  - On October 8, 2008 a concerted ½ percentage point cut in policy rates by the Fed, ECB, Bank of England, Bank of Canada, and Sweden’s Riksbank; Swiss National Bank also lowered its benchmark rate; Bank of Japan endorsed the move.
  - Peoples Bank of China cut a key interest rate and lowered reserve requirements.
- Limits and divergence:
  - Within months the Fed’s policy rate effectively reached zero, precluding further coordinated rate cuts.
  - The Fed initiated unconventional monetary policies:
    - Initial announcements of Fed purchases of MBS occurred in November 2008.
    - Forward guidance on the path of policy rates initially announced in December 2008.
    - Purchases of Treasury bonds announced in March (following month).
  - Other central banks later announced unconventional policies:
    - Bank of England initiated asset purchases in March 2009.
    - Bank of Japan announced forward guidance and asset purchases in 2010.
    - European Central Bank implemented its Securities Market Program later in 2010.
- Domestic focus and limited international coordination:
  - Press releases initiating unconventional monetary policies focused on domestic conditions; Federal Reserve statement had no mention of the rest of the world.
  - Little evidence of policy cooperation later: three major monetary expansions in fall/winter 2012/13 (ECB Open Market Transactions Aug/early Sept; Fed QE3 mid-Sept; BOJ new 2 percent inflation target Jan 2013) had releases devoid of a global view.
- Spillovers and emerging markets:
  - Unconventional policies associated with major capital flows into emerging markets (IMF, 2013f, g).
  - In 2012/early 2013 emerging markets complained of a “wall of money” appreciating exchange rates; concerns elicited no source-country central bank response.
  - Market reversal and volatility started after the May 22, 2013 discussion of tapering by Chairman Bernanke.
- G-20 response and communication:
  - September 5–6, 2013 G-20 St. Petersburg communiqué recognized spillovers and included commitments on careful calibration and clear communication.
  - February 22–23 Sydney communiqué emphasized consistent communication and cooperation on managing spillovers and global safety nets.

### Fiscal policy: coordinated stimulus, subsequent consolidation, and EU reform
- Immediate coordinated fiscal response:
  - G-20 Washington leaders’ summit, November 15, 2008: call to “use fiscal measures to stimulate demand to rapid effect, as appropriate, while maintaining a policy framework conducive to fiscal sustainability.”
  - IMF Managing Director (Strauss Kahn) advocated a global fiscal stimulus of 2 percent of world GDP and argued fiscal multiplier around one.
  - Fund analysis: stimulus measures pledged of the order of 1¼–2 percent of (weighted) G20 GDP in 2009 and 1½ percent in 2010.
- Major country stimulus pledges:
  - United States: promised stimulus of 2 and 3 percent of GDP in 2009 and 2010, respectively.
  - China: 2 percent in both years.
  - Germany: 1½ and 2 percent.
  - Japan: almost 2 percent of GDP over two years.
- Outcome:
  - G-20 advanced economies estimated to have boosted cyclically adjusted deficits by 2½ percent of GDP in 2009 and a further ½ percent in 2010.
  - Emerging markets provided stimulus of 2¼ percent of GDP in 2009 then withdrew almost a percentage point in 2010.
- Shift toward consolidation:
  - Toronto summit, June 2010: leaders pledged fiscal plans to at least halve budget deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016.
  - Sluggish growth and the European crisis made these plans more challenging; risk that 2013 goal could be missed by several countries (United States likely achieved its 2013 target; Japan likely missed its one).
- Europe:
  - Tension between achieving nominal deficits below 3 percent of GDP and growth concerns.
  - Outcomes: greater leeway for countries to determine fiscal paths; progress on fiscal surveillance via Fiscal Compact, Six Pack, and Two Pack.

### Financial sector reform: principles, compromises, and fragmentation
- G-20 financial reform agenda emphasized:
  - Strengthening transparency and accountability; enhancing sound regulation; promoting market integrity; reinforcing international cooperation; reforming international financial institutions.
  - Specific objectives: tighter regulation of credit rating agencies; expanded membership of Financial Stability Forum; better risk modeling; mandatory World Bank/Fund Financial Sector Assessment Programs for major economies; greater disclosure of complex instruments.
- Basel and capital regulation:
  - Basel 2 flaws exposed:
    - Capital dilution: complex definitions diluted loss-absorbing capital.
    - Risk dilution: internal models used to minimize risk-weighted assets.
    - Fragmentation: US did not implement Basel 2; US commercial banks faced a “simple leverage ratio” regime.
  - New proposals: Basel 2.5 and Basel 3 (Basel Committee, 2011 and 2013) include tighter capital definition, augmenting risk-weighted ratio with a simple leverage ratio, a liquidity coverage ratio, and capital surcharges for large banks.
  - Implementation issues:
    - Core standards watered down (e.g., liquidity ratio weakened), partly implemented or delayed (Basel 3 not going into effect until 2018), and sometimes ignored (EU deliberations on leverage ratio).
    - Country-specific regulatory initiatives (Dodd-Frank, Vickers, Liikanen) risk regulatory fragmentation.
    - US plan to impose a simple leverage ratio of 6 percent on major commercial banks may again create a different practical regime for US banks.
- Crisis management and resolution:
  - “Key Attributes of Effective Resolution Regimes” provides blueprint, but implementation slow and uneven.
  - Cross-border resolution lagging; proposals for “Single Point of Entry” between US, UK, Switzerland hold promise.
- Other issues:
  - Progress on banking secrecy improved (e.g., Switzerland).
  - Move to exchange-traded derivatives slower than anticipated; more derivatives traded over the counter; centralized exchanges risk creating new “too big to fail” institutions.

### Trade and the G-20 policy mix
- Trade protectionism commitments:
  - London Summit, April 2009: leaders committed to “refrain from raising new barriers to investment or trade... imposing new export restrictions... or implementing WTO inconsistent measures to stimulate exports” until end-2010.
  - Pledged $250b in additional trade credit and asked regulators to use “available flexibility” in capital requirements for trade finance.
  - Pledge extensions continued; current end date is end-2016.
- Outcomes:
  - Restrictions still cover less than 4 percent of G-20 imports.
  - Econometric models predicted a much larger jump in protectionism, indicating the pledge largely worked.
  - WTO legal framework and institutional arrangements helped deter large-scale protectionism.
- G-20 Mutual Assessment Process (MAP):
  - Pittsburgh summit, September 2009: introduced a “Framework for Strong, Sustainable and Balanced Growth” and MAP to assess policy consistency with balanced growth.
  - MAP intended to use Fund analysis to overcome cooperation failures: internalize strategic interactions and use peer pressure to overcome domestic political obstacles.
  - MAP weaknesses over time:
    - Splintered objectives (strong, sustainable, balanced growth parsed into three objectives) diluted accountability.
    - Distrust, especially as MAP focused on external imbalances and identified countries with internal imbalances.
    - Distractions from reintensified European crisis.
  - Result: countries generally submitted policies they already planned; limited genuine cooperation.
- External imbalances fell dramatically, but Fund assessment (2013 Pilot External Sector Report) found little of the fall attributable to policies or policy cooperation.

### Domestic policy cooperation and institutional suggestions
- Little change in domestic monetary-fiscal cooperation post-crisis; independent central banks remained the norm.
- Central banks typically shy away from public discussion of optimal policy mix, partly to avoid political interference; yet independence is not equivalent to policy separation.
- Regulatory coordination progress differs: domestic financial regulatory coordination often addressed by creating high-level coordinating groups.
- Proposal: create high-level committees (ideally independent agencies) to coordinate overall macroeconomic and structural policy mix; conduct regular “war games” on insolvency of major international banks involving Treasuries as well as regulators.

### Conclusions and policy recommendations
- Three broad conclusions:
  - Cooperation is driven more by fears of bad outcomes than desires for better ones; cooperation peaks around crises.
  - Cooperation is most effective where lack of cooperation is clearly destructive and where institutional frameworks provide enforcement or clear processes (trade/WTO example).
  - Disagreements about policy spillovers and impacts across countries hinder cooperation; differences in views on fiscal consolidation and unconventional monetary policy are illustrative.
- Three-fold agenda for economists to promote effective cooperation:
  - Focus on potential costs from bad policies rather than marginal gains from good ones; “connect the dots” to show how non-cooperative policies can cascade into very bad global outcomes.
  - Put more effort into suggesting better institutional arrangements that are enforceable or clear; examples include high-level domestic coordination committees and regular insolvency war games.
  - Work to build consensus on the impact of policies both within and across countries; further work on international interconnectedness and convincing policymakers of large costs from failures of cooperation.
- Final observation: cooperation peaked in crisis, succeeded where enforcement or clear institutions existed (trade), and floundered where goals were fuzzy and enforcement weak (MAP). The paper urges moving beyond linear game-theory models to focus on avoiding catastrophic outcomes.

*Source: _wp1497 - introduction of reciprocal swap lines across the major central banks (discussed in Fleming*

### References

### _wp1497 - References

### Monetary policy, central banking, and unconventional policy
- Bank of England, 2009, “Minutes of the Monetary Policy Meeting March 4–5 2009.” http://www.bankofengland.co.uk/publications/minutes/Documents/mpc/pdf/2009/mpc0903.pdf, March 18.
- Bank of Japan, 2012, “Statement of Monetary Policy,” http://www.boj.or.jp/en/announcements/release_2012/k120313a.pdf, March 13.
- Bank of Japan, 2013, “The “Price Stability Target” under the Framework for the Conduct of Monetary Policy,” http://www.boj.or.jp/en/announcements/release_2013/k130122b.pdf, January 22.
- Board of Governors of the Federal Reserve System, 2013a, “Central Bank Liquidity Swap Lines” http://www.federalreserve.gov/newsevents/reform_swaplines.htm.
- Board of Governors of the Federal Reserve System, 2013b, “Central Bank Liquidity Swaps,” http://www.federalreserve.gov/monetarypolicy/bst_liquidityswaps.htm.
- Federal Reserve Board, 2009, “Press Statement after the March 17–18 FOMC Meeting,” http://www.federalreserve.gov/newsevents/press/monetary/20090318a.htm, March 18.
- Federal Reserve Board, 2012, “Press Statement after the September 12-13 FOMC Meeting,” http://www.federalreserve.gov/newsevents/press/monetary/20120913a.htm, March 18.
- Federal Reserve Board, 2013, “Transcript of Chairman Bernanke’s Press Conference,” http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20130918.pdf, September 18.
- Federal Reserve Bank of New York, 2013, “Central Bank Liquidity Swaps,” http://www.newyorkfed.org/markets/liquidity_swap.html.
- Fleming, Michael J. and Nicholas J. Klagge, 2010, “The Federal Reserve’s Foreign Exchange Swap Lines” in Current Issues in Economics and Finance, Volume 16, Number 4, April 2010, (New York: Federal Reserve Bank of New York).
- European Central Bank, 2011, “Introductory Statement to the Press Conference (with Q&A),” http://www.ecb.europa.eu/press/pressconf/2011/html/is111006.en.html, October 6.
- European Central Bank, 2012, “Introductory Statement to the Press Conference (with Q&A)” http://www.ecb.europa.eu/press/pressconf/2012/html/is120802.en.html, August 2.
- International Monetary Fund, 2013a, “Unconventional Monetary Policy—Recent Experience and Prospects,” IMF Policy Paper (Washington). http://www.imf.org/external/np/pp/eng/2013/041813a.pdf
- International Monetary Fund, 2013b, “Unconventional Monetary Policy—Recent Experience and Prospects—Background Paper,” IMF Policy Paper (Washington). http://www.imf.org/external/np/pp/eng/2013/041813.pdf
- International Monetary Fund, 2013f, “Global Impact and Challenges of Unconventional Monetary Policies,” IMF Policy Paper (Washington). http://www.imf.org/external/np/pp/eng/2013/090313a.pdf

### Financial regulation, resolution, and stability
- Basel Committee on Banking Supervision, 2011, “Basel III: A Global Regulatory Framework for more Resilient Banks and Banking Systems,” (Bank for International Settlements), revised June 2011.
- Basel Committee on Banking Supervision, 2013, “Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools,” (Bank for International Settlements), January 2011.
- Financial Stability Board, 2011, Key Attributes of Effective Resolution Regimes for Financial Institutions, http://www.financialstabilityboard.org/publications/r_111104cc.pdf, October 2011.
- Financial Stability Board, 2013a, “A Narrative Progress Report on Financial Reforms,” Report of the Financial Stability Board to G20 Leaders, September 2013.
- Financial Stability Board, 2013b, “Progress in Implementing the G20 Recommendations on Financial Regulatory Reform,” Status report by the FSB Secretariat, September 2013.
- Claessens, Stijn, Ceyla Pazarbasioglu, Luc Laeven, Marc Dobler, Fabian Valencia, Oana Nedelescu, and Katherine Seal, 2011, “Crisis management and Resolution: Early Lessons from the 2007–2009 Crisis,” IMF Staff Discussion Note No. 11/05 (Washington: International Monetary Fund). https://www.imf.org/external/pubs/cat/longres.aspx?sk=24694.0
- International Monetary Fund, 2012b, “The Key Attributes of Effective Resolution Regimes for Financial Institutions—Progress to Date and Next Steps,” IMF Policy Paper (Washington). http://www.imf.org/external/np/pp/eng/2012/082712.pdf
- Wright, David, 2014, “Strengthening the Global Financial Regulatory Architecture after the Crisis” in How Are Emerging and Developing Countries Affected by Monetary and Regulatory Spillovers from Advanced Economies, Conference Report on a High-Level Roundtable on Finance, Global Economic Governance Program, University of Oxford held on February 12, 2014.

### IMF reports, spillover analysis, and public finance
- International Monetary Fund, 2009a, “The State of Public Finances—Outlook and Medium-Term Policies After the 2008 Crisis,” IMF Policy Paper (Washington). http://www.imf.org/external/np/pp/eng/2009/030609.pdf
- International Monetary Fund, 2009b, “Companion Paper: The State of Public Finances—Outlook and Medium-Term Policies After the 2008 Crisis,” IMF Policy Paper (Washington). http://www.imf.org/external/np/pp/eng/2009/030609a.pdf
- Horton, Mark, Manmohan Kumar, and Paolo Mauro, 2009, “The State of Public Finances: A Cross-Country Monitor,” IMF Staff Position Note 09/21, (Washington: International Monetary Fund).
- International Monetary Fund, 2010, “The IMF-FSB Early Warning Exercise: Design and Methodological Tool Kit,” IMF Policy Paper (Washington). http://www.imf.org/external/np/pp/eng/2010/090110.pdf
- International Monetary Fund, 2011, The United States: Spillover Report—2011 Article IV Consultation, IMF Country Report No. 11/203 (Washington).
- International Monetary Fund, 2012a, “2012 Spillover Report,” IMF Policy Paper (Washington). http://www.imf.org/external/np/pp/eng/2012/070912.pdf
- International Monetary Fund, 2013c, “2013 Spillover Report, IMF Multilateral Issues Report,” IMF Policy Paper (Washington). http://www.imf.org/external/np/pp/eng/2013/070213.pdf
- International Monetary Fund, 2013d, Fiscal Monitor, April 2013: Fiscal Adjustment in an Uncertain World, World Economic and Financial Surveys (Washington). http://www.imf.org/external/pubs/ft/fm/2013/01/fmindex.htm
- International Monetary Fund, 2013e, “2013 Pilot External Sector Report, IMF Multilateral Issues Report,” IMF Policy Paper (Washington). http://www.imf.org/external/np/pp/eng/2013/062013.pdf
- International Monetary Fund, 2013g, “Where the IMF Gets its Money” (Washington). http://www.imf.org/external/np/exr/facts/finfac.htm

### Academic and working papers on spillovers, coordination, and behavioral economics
- Angeloni, Ignazio and Jean Pisani-Ferry, 2012, “The G20: Characters in Search of an Author,” Bruegel Working Paper 2012/4 (Brussels: Bruegel Institute).
- Bayoumi, Tamim, and Trung Bui, 2012, “Apocalypse Then: The Evolution of the North Atlantic Economy and the Global Crisis” in The Australian Economy in the 2000s, proceedings of a conference held in Sydney on 15–16 August 2011, Reserve Bank of Australia, p. 37–72.
- Bayoumi, Tamim, and Manju Ismael, 2013, “Liaisons Dangereuse,” (Washington: International Monetary Fund). Unpublished mimeo.
- Bayoumi, Tamim, and Francis Vitek, 2013, “Macroeconomic Model Spillovers and Their Discontents,” IMF Working Paper 13/4 (Washington: International Monetary Fund).
- Benes, Jaromir, Michael Kumhof, Douglas Laxton, Dirk Muir and Susanna Mursula, 2013, “The Benefits of International Policy Coordination Revisited,” IMF Working Paper 13/262 (Washington: International Monetary Fund).
- Faruqee, Hamid and Krishna Srinivasan, 2013, “The G-20 Mutual Assessment Process—a Perspective from IMF Staff,” Oxford Review of Economic Policy, Vol. 28, Number 3, September 26, 2013, pp. 493–511(19).
- Rey, Hélène. 2003, “Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence.” Proceedings of the Federal Reserve Bank of Kansas City 2013, Economic Policy Symposium, Jackson Hole, WY.
- Kahneman, Daniel, 2003, “Maps of Bounded Rationality: Psychology for Behavioral Economics,” American Economic Review, Vol. 93 (December), pp. 1449–1475.
- Brown, Chad and Meredith Crowley, 2012, “Import Protection, Business Cycles, and Exchange Rates: Evidence from the Great Recession,” Journal of International Economics, Volume 90, pp. 50–64.
- Benes, Jaromir et al., 2013, “The Benefits of International Policy Coordination Revisited,” IMF Working Paper 13/262 (Washington: International Monetary Fund).

### Media, commentary, and news sources
- Financial Times, 2013a, “Germany Feels US Ire Over War on Currencies,” http://www.ft.com/intl/cms/s/0/2d2965f4-4313-11e3-9d3c-00144feabdc0.html, November 1.
- Financial Times, 2013b, “Merkel Pressed to Ease up on Austerity,” http://www.ft.com/intl/cms/s/0/cf7536d6-acef-11e2-9454-00144feabdc0.html#axzz2n0OgMl85, April 24.
- Financial Times, 2013c, “Merkel Speech Highlights European Divide,” http://www.ft.com/intl/cms/s/0/665e1018-adae-11e2-a2c7-00144feabdc0.html#axzz2n0OgMl85, April 25.
- New York Times, 2008, “Central Banks Coordinate Global Cut in Interest Rates,” http://www.nytimes.com/2008/10/09/business/09fed.html?pagewanted=all, October 8.
- Reuters, 2013, “Global currency war could get nastier, warns Brazil's Mantega,” http://www.reuters.com/article/2013/02/08/us-g20-brazil-euro-idUSBRE9170N220130208, February 8.
- Official Monetary and Financial Institutions Forum, 2012, “Re-elected Obama May Take the Gloves off with Europe,” http://www.omfif.org/intelligence/the-commentary/2012/november/re-elected-obama-may-take-the-gloves-off-with-europe/ November 13.

*Source: _wp1497 - References*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp1497.pdf_