CONSTRUCTING an ELIGIBILITY INDEX for THE FEDERAL RESERVE SWAP LINE

Abstract

This study explores the eligibility criteria for swap line agreements with the Federal Reserve (Fed) by constructing a composite index that incorporates macroeconomic and U.S.-related indicators. The aim is to provide insight into the factors affecting the Fed’s decision-making process and shed light on the variables that impact a country’s eligibility for swap lines focusing on the Global Financial Crisis period and Covid-19 pandemic period. Using logistic regression model and principal component analysis, the study constructs two sub-indices: the Macroeconomic Index and the U.S. Related Index. These indices capture relevant indicators likely used in the assessment process of countries. The model’s effectiveness is tested by analyzing countries that were rejected for swap line agreements. Findings reveal that several macro-level variables and U.S.-related variables significantly explain a country’s probability of establishing a secure swap line with the Fed. Key indicators include trade volume, real GDP, international reserves, external debt, and U.S. financial claims on foreign countries. The constructed composite index successfully predicts eligibility outcomes for the countries studied, demonstrating a high level of accuracy. Policy implications derived from the study highlight the importance of transparency, robust index construction, macroeconomic stability, bilateral relationships, and predictive modeling.