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Mrs. Isabelle Mateos y Lago, Rupa Duttagupta, and Rishi Goyal
This paper considers options to address concerns related to functioning of the International Monetary System. Despite its relative stability, the current “non-system” has the inherent weaknesses of a setup with a dominant country-issued reserve currency, wherein the reserve issuer runs fiscal and external deficits to meet growing world demand for reserve assets and where there is no ready mechanism forcing surplus or reserve-issuing countries to adjust. The problem has amplified in recent years in line with a sharp rise in the demand for reserves, reflecting in part emerging markets’ tendency to self-insure against costly capital account crises. On the demand side, the paper explores alternative insurance arrangements that could mitigate the precautionary demand for reserves. On the supply side, it assesses a menu of alternative reserve assets that could offer sustained stability and efficiency. Many of the proposals presented would require fundamental changes in the forms and degree of international cooperation, however, may gain realism and practical relevance if more incremental efforts at strengthening the current system fail.
International Monetary Fund. External Relations Dept.

the Fund’s Executive Board outlining several possible approaches to the scheme. The Committee held a general review of the topic and agreed on the desirability of further study by the Executive Board. The conclusions, which the Board will present in Belgrade, will cover the magnitude of the account, the liquidity, yield, and other characteristics of the contemplated SDR-denominated reserve asset, the legal aspects of the establishment and operation of the account, and other pertinent technical matters. In a joint press conference held after the Committee’s March 7

Mrs. Isabelle Mateos y Lago, Rupa Duttagupta, and Rishi Goyal

also greatly more convenient than managing an equivalent portfolio of the component currencies). Being a derivative product, whether an SDR-denominated reserve asset would be a good store of value would still very much depend on the stability of the component currencies. However, as the weights of different currencies in the SDR basket are defined in “hard” terms (e.g., 44 U.S. dollar cents per SDR), relative weights adjust automatically on the basis of exchange rate movements, providing a policy disciplining mechanism on reserve issuers (as a country issuing too

International Monetary Fund
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 SDRdenominated 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 in this paper.
International Monetary Fund

reducing reserve accumulation and contributing to resolve global imbalances. Section III discusses steps to develop new SDR-denominated reserve assets. Section IV elaborates on the use of the SDR as a unit of account for global trade and financial instruments to reduce the impact of exchange rate volatility. Section V discusses tradeoffs in expanding the SDR basket. Section VI concludes with issues for discussion. II. Reducing Reserve Accumulation A. Expanding the Supply of Official SDRs 5. Why? Expanding the volume of official SDRs is a

International Monetary Fund. Finance Dept.

for administrative payments) and decreases when borrowing members use the currency to make repayments. Reserve tranche positions are part of each member’s liquid international reserves because, when a member has a balance of payments need, it may convert its SDR-denominated reserve asset into SDRs or one or more freely usable currencies by drawing on the IMF. A member may also be obligated to provide if necessary reserve assets of up to 100 percent of its quota. The reserve tranche can be considered as the “facility of first resort.” It stands apart from the

International Monetary Fund. Finance Dept.

’s currency to lend to other members (or for administrative payments) and decreases when borrowing members use the currency to make repayments. Reserve tranche positions are part of each member’s liquid international reserves because, when a member has a balance of payments need, it may convert its SDR-denominated reserve asset into SDRs or one or more freely usable currencies by drawing on the IMF. A member may also be obligated to provide if necessary reserve assets of up to 100 percent of its quota. The reserve tranche can be considered as the “facility of first resort

International Monetary Fund

decreases when borrowing members use the currency to make repayments. Reserve tranche positions are part of members’ liquid international reserves because a member may, subject only to its representation of a balance of payments need, convert its SDR-denominated reserve asset into one or more freely usable currencies by drawing on the IMF ( Box II.8 ). A member is obligated, if necessary, to provide an amount of reserve assets of up to 100 percent of its quota. The amount of reserve assets provided to the IMF has in practice fallen well below this maximum ( Figure II. 5

International Monetary Fund. Finance Dept.

for administrative payments) and decreases when borrowing members use the currency to make repayments. Reserve tranche positions are part of each member’s liquid international reserves because, when a member has a balance of payments need, it may convert its SDR-denominated reserve asset into SDRs or one or more freely usable currencies by drawing on the IMF. A member may also be obligated to provide if necessary reserve assets of up to 100 percent of its quota. The reserve tranche can be considered as the “facility of first resort.” It stands apart from the

international monetary system envisaged in this section than it is today. With the underlying commitment to stability, the need for international reserves to protect the external value of national currencies relative to the SDR could grow, even though intervention would have to be coupled with timely adjustment. SDR-denominated claims could be generated by members through lending to the Fund or substituting foreign exchange for SDR-denominated claims on the Fund during a transition period, but all countries might feel a continuing need for the supply of SDRs or SDR-denominated