Crisis Decisions: Political Influences on FOMC Decision-Making during the 2007 Financial Crisis and the Creation of Foreign Credit Liquidity Swap Lines

Open Access
- Author:
- Quinn, Kathleen M
- Area of Honors:
- Political Science
- Degree:
- Bachelor of Arts
- Document Type:
- Thesis
- Thesis Supervisors:
- David Lynn Lowery, Thesis Supervisor
Dr. Michael Barth Berkman, Thesis Honors Advisor - Keywords:
- Federal Reserve
FOMC
decision-making
2007 financial crisis
swap lines
reciprocal currency agreements
monetary politics - Abstract:
- In response to the 2007 financial crisis, the Federal Reserve made a series of unprecedented policy decisions to save the United States and the rest of the world from total economic collapse. Nineteen members of the Federal Open Market Committee (FOMC), the decision-making body of the Federal Reserve, debated the implementation of these unconventional policies in the same manner they make all of their policy decisions—in secret. Why does the Federal Reserve make decisions the way they do? The shrouded nature of FOMC decision-making inspired three decades of empirical research that has developed broad theories about the political and institutional influences on Fed policy decisions based on FOMC member voting and dissent behavior. My research addresses a practical gap in the theoretical literature. Previous research has modeled FOMC decision-making under relatively standard economic conditions. My analysis will “stress test” the existing theories of FOMC decision-making by analyzing the transcripts of the 2007-2008 FOMC meetings that surround the establishment of foreign liquidity swap lines with multiple foreign central banks. In my case analysis of the foreign liquidity swap lines decision, I will test the behavior and preferences of individual FOMC members against the leading theories FOMC decision-making to see if these theories hold during the 2008 financial crisis. This analysis has implications on the validity of current theories of influence on FOMC decisions, and their application to crisis response. This crisis episode will strip bear the decision-making processes of the Federal Reserve and reveal the strongest influences that determine their policy decisions. The Fed’s decision to implement foreign liquidity swap lines has a number of implications about the changing role of the United States in international monetary policy, the emergence the Federal Reserve as the international “lender of last resort”, and the effects of global monetary policy coordination among central banks.