Emerging Markets Institute (EMI) Fellow proposes new mechanism for global liquidity insurance


Media reports on Prof. Eswar Prasad’s presentation of new concept to Federal Reserve Bank at annual economic policy symposium

Emerging Markets Institute (EMI) Fellow proposes new mechanism for global liquidity insurance

Eswar Prasad, the founding academic Fellow for Johnson’s Emerging Markets Institute (EMI), presented new financial liquidity research to the Federal Reserve Bank of Kansas City, following opening remarks by Chairman of the Board of Governors of the Federal Reserve, Ben Bernanke, at its annual economic policy symposium on August 25 in Jackson Hole, Wyoming.  Prasad, who is a professor of international trade policy at the Dyson School of Applied Economics and Management at Cornell University, proposed a new mechanism for global liquidity insurance for emerging markets as a way to insure themselves against potential balance of payments crises.

In a presentation covered by Bloomberg and Reuters, Prasad said that in the landscape of global financial markets, countries use their “war chests” of huge accumulated foreign currency reserves to “self insure” themselves against crises.  This presents a problem, however, in that they are holding them in the form of public debt in developed markets that are on a “deteriorating trajectory.” Prasad said this makes these markets vulnerable and suggested that a transparent, rules-based insurance scheme may be a more efficient way for them to ease this pressure on themselves.  He laid out guidelines on what kind of premiums different countries would be charged and offered that if a country gets hit by a liquidity crisis, it would then be able to receive an temporary open line of credit to deal with the problem secured by a mix of public debt that they need to pay back. The program would not be run by the IMF, ECB, Federal Reserve but ideally the BIS or Global Financial Stability Board of the G20.

Prasad’s paper is available HERE and additional research presented at the symposium can be found HERE