In March of 2009, People's Bank of China Governor famously made his "Reform the International Monetary System" speech. Until now, we still do not have a clear reason why he made this speech. A Chinese colleague suggested it was to appease Chinese politicians who had grown tired of the export lobby's continuing predominance in policy circles. (No, the Communist Party is not monolithic.) In any event, Zhou reiterated the Chinese view that the United States' exorbitant privilege of issuing the world's standard reserve currency allowed it to abuse the aforementioned system. The United States, in effect, gave in to the temptation to flood the world economy with uncontrolled dollar emissions. His suggestions were many, including broadening the world's reserve currencies to reflect the shifting global balance of economic power. Among other things, expanding the role of the IMF's special drawing rights (SDRs)--a form of currency serving as money only within Bretton Woods institutions--to encompass trade and reserve accumulation functions was mooted by Zhou.Lost in the piles of post-worthy material I have accumulated (apologies) is a recent IMF paper that assesses whether expanding the role of SDRs would improve the stability of the international system. My quick read? Yes, it may, but there are significant political hurdles along the way that need to be surmounted. What follows is the overview of the paper; the rest is well-worth reading especially for IPE junkies, global imbalance addicts, and other sorts with obsessive-compulsive tendencies. Enjoy?
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Overview
- The SDR has enjoyed renewed attention lately in the context of debates on international monetary reform. To be sure, the term SDR has been used to refer to three different concepts—(i) a composite reserve asset created in 1969: the “official SDR” as defined in the Fund’s Articles; (ii) a potential new class of reserve assets: tradable SDR-denominated securities issued by the Fund or an investment vehicle backed by a subset of the Fund’s membership; and (iii) a unit of account, which could be used to price internationally traded assets (e.g., sovereign bonds) and goods (e.g., commodities), to peg currencies, and to report balance of payments data. All three are discussed here.
- In these different roles, the SDR might help serve respectively the following objectives: reducing the extent and costs of international reserve accumulation; augmenting the supply of safe global assets and facilitating diversification; and reducing the impact of exchange rate volatility among major currencies. Expanding the SDR basket to major emerging market currencies presents trade-offs, but could further support these objectives.
- In order to make a difference in any of these areas, the role played by the SDR would need to be enhanced considerably from its current insignificant level. Very significant practical, political, and legal hurdles would need to be overcome in the process. Given the potential benefits however, experimental steps along the lines outlined here could be considered in the years ahead. In this spirit, the paper open-mindedly puts forward a broad range of options for debate. As the international community comes to a firmer view on the SDR’s potential role, the most promising options could be assessed further.
- Clearly, problems in the international monetary system (IMS)—persistent global imbalances, large and volatile capital flows, exchange rate gyrations disconnected from fundamentals, insufficient supply of safe global assets—are complex and call for an array of remedies—global policy collaboration and stronger surveillance, enhanced systemic financial safety net, financial deepening in emerging markets and more generally development of new reserve assets. The issue is whether there is a helpful role to play for the SDR amid these solutions. This paper suggests there might be.
