Domestic Politics Constrain How Great Powers Pursue Monetary Hegemony: A Comparison Between the United States and China Currency Swap Policies

The political economy literature shows that monetary hegemony guarantees significant privileges to a country's economy — governments gain greater flexibility in their budgetary and current accounts without incurring significant macroeconomic imbalances. Such greater economic policy flexibility also shapes the global balance of power since governments have fewer fiscal constraints to enhance their military spending. One of the main instruments governments can use to enhance or preserve their currency's position in the international monetary system is establishing currency swap lines with other central banks. Yet the policies of central banks differ, and so do their effects on currency power. Why? I contend that a country's political regime explains the different constraints it faces in its quest for monetary hegemony. In this thesis, I develop a theoretical framework to elucidate the difference between currency swap policies in democracies and autocracies. I test this theory in a comparative analysis of the Fed and PBOC currency swap policies. I find that the United States restrains access to its currency swap lines with countries that are critical to the stability of the global economy and that levy small credit risk to the Fed. Ultimately, the US monetary authority fears domestic political backlash from their international operations. In the case of China, credit risk is not a concern due to the lack of popular scrutiny. Swap lines are extended to advanced and developing economies as financial stability and economic development instruments. However, China's swap line policies cannot fully succeed since the authoritarian nature of the government impedes the implementation of reforms necessary for a country's monetary rise: free capital flows and liquid capital markets.