Central Bank swap lines: Construction of a Composite Index for the Federal Reserve

Central bank swap line agreements, which have been utilized with different motives by the Federal Reserve since the 1960s, came to the fore during the global financial crisis and the COVID-19 pandemic. The Federal Reserve, acting as the lender of last resort for the U.S. dollar, has turned down some countries that have requested to benefit from this facility due to a set of eligibility criteria that are not disclosed to the public. This thesis seeks an answer to the question of which countries could benefit from swap lines by constructing a Composite Index composed of two sub-indices, the Macroeconomics Index and the U.S. Related Index, which include indicators that are likely to be used in the assessment process of countries. This thesis, whose data set consists of 10 different indicators and 21 different countries, 14 of which have a currency swap line agreement with the Federal Reserve, focuses on the periods of the global financial crisis (2005-2011) and the COVID-19 pandemic (2017-2020). The index construction process is carried out through the principal component analysis. The robustness of both the sub-indexes and the composite index is tested by including a group of countries whose requests to establish swap line agreements with the Federal Reserve have been turned down and creating a consolidated period composed of two separate periods. The Composite Index constructed by this thesis has a 60 percent success rate in explaining whether any country's request to participate in the central bank swap line will be accepted by the Federal Reserve. Most of the countries claimed to have been rejected by the Federal Reserve are found ineligible to establish central bank swap line agreements by the Composite Index. In short, this thesis finds that not every requesting country can benefit from the central bank swap line. This thesis concludes that other possible quantitative and qualitative indicators, such as political relations with the United States of America, geopolitical importance, and political stability, may be effective in the assessment of some countries with a Composite Index value above the threshold value but rejected.