The Fed, the IMF and global ‘last resort’ lending

THE US dollar has long been the globally dominant currency and will remain so for the foreseeable future. The International Monetary Fund (IMF) is the lynchpin of the international monetary system. These two statements are regarded as quasi-axiomatic. But how do they hang together?

The global landscape comprises nation states. There are significant economic and financial interdependencies among countries. IMF serves as one “universal” institution. While many analysts focus on the dollar’s reserve currency status, its role in greasing the wheels of international finance is of greater significance and more entrenched.

The Federal Reserve has a domestic mandate. While the Fed monitors and is sensitive to the global spillovers of its policies – and these are undeniably critical – it takes into greater account whether foreign developments have spillback effects on the optimal functioning of the US economy. Given how large and closed the US economy is, spillbacks are limited in normal times.