Search

We call for strengthening the Global Financial Safety Net (GFSN) to manage the economic effects of COVID‐19, in particular the massive capital outflows from emerging market and developing economies EMDEs and the global shortage of dollar liquidity. Both the United Nations (UN) and the International Monetary Fund (IMF) estimate that EMDEs need an immediate $2.5 trillion, yet the financing available to them is just $700 to $971 billion. To meet these immediate needs we propose to: (1) broaden the coverage of the Federal Reserve currency swaps; (2) issue at least $500 billion of special drawing rights through the IMF; (3) improve the IMF’s precautionary and emergency facilities; (4) establish a multilateral swap facility at the IMF; (5) increase the resources and geographic coverage of regional financial arrangements; (6) coordinate capital flow management measures; (7) initiate debt restructuring and relief initiatives; and (8) request that credit‐rating agencies stop making downgrades during the emergency. It argues that leaders should swiftly move to address these structural gaps in the GFSN: (1) agree on a quota reform at the IMF; (2) create an appropriate sovereign debt restructuring regime; (3) expand surveillance activity; and (4) adopt IMF governance reform and strengthen its relations with all agents of the GFSN. All of these reforms must be calibrated toward a just transition to a more stable, inclusive, and sustainable global economy.

Since the end of the Bretton Woods era, the world has operated on a de facto system of free‐floating exchange rates, with the US dollar as the dominant international currency. The system, characterized by large pro‐cyclical capital flows and chronic imbalances, is inherently unstable, and has contributed to repeated crises, recessions and geopolitical tensions. One potentially “least‐difficult” line of reform would be to allow the evolution of a multi‐currency system, underpinned by an expanded role for Special Drawing Rights (SDRs). Attempts to promote wider use of the SDR have foundered on the liquidity premium. However, for Chinese corporations and institutions, at present restricted in their capital account activities, the SDR liquidity premium would appear less daunting. The Chinese authorities could provide policy encouragement for the use of SDRs by their institutions. This initiative, supported by China's Special Administrative Region Hong Kong, would kick‐start an international SDR ecosystem, and encourage even broader use of SDRs, to the benefit of international monetary stability.

This article focuses on the political economy that shaped the Special Drawing Right (SDR) by examining the three drivers of reform that influenced the creation of the SDR and resulted in changes in the international monetary system (IMS) and the International Monetary Fund (IMF). The three factors examined are, first, informal intergovernmental forums working outside the framework of the IMF; second, the eclipse of the IMF as the central institution of the IMS; and finally, the lack of reference to the private sector in the discussions, even though capital movements were the central cause of strains in the IMS. The article concludes that the resulting limitations of the SDR solution—an institutional change brought about by the compromise between parties to the discussions—meant that major imperfections in the IMS remained unresolved.

The impact of currency reserve accumulation is controversially discussed since reserve accumulation potentially destabilises the international financial system and causes crises due to higher systemic risk. The main aim of this paper is to put the macroeconomic role of currency reserve accumulation for four Asian economies under closer scrutiny. The key question is whether accumulating currency reserves is beneficial from a long†run perspective. Based on a vector error correction approach, we start by analysing long†run steady†state relationships between currency reserves, exchange rates against the US dollar, real GDP and interest rates. Our findings show that cumulated currency reserve shocks significantly affect real GDP. A likely explanation for our finding is that accumulation of reserves has supported growth through providing liquidity and supporting the development of the financial sector for the economies under observation.

Since the financial crisis hit in 2007, the US dollar privilege has not only become “exorbitant” but “extortianate.” Countries such as China are no longer willing to allow the USA to exercise this extortionate behavior. The potential geopolitical implications of a US dollar decline are immense. The USA would lose its privileged seigniorage position and with that the ability to achieve permanently higher returns on foreign assets than the returns paid to foreigners who invest in the USA. The global economy is already close to operating with three regional exchange rate anchors: the US dollar; the euro; and, increasingly, the renminbi. Hence, the transition to a tripolar system could occur sooner than many assert. Nevertheless, given the importance of financial deepening and integration in the internationalization of currencies, any shift will still be gradual.

Advocates of a more pluralistic international monetary and financial system seek to reduce reliance on a single national currency and to bring international liquidity under collective control. One recently revived proposal would transform US dollar official reserves into claims denominated in the IMF's key currency basket, Special Drawing Rights (SDRs). Drawing on new archival evidence and simulations, this article highlights issues that derailed earlier agreement on such an account and shortcomings of design and ambition revealed by subsequent developments. One design issue was account losses if US dollar yields failed to exceed SDR yields enough to offset dollar depreciation. In fact, uncovered interest parity did not hold and could well have left the account persistently insolvent. Another shortcoming was ambition: the proposed account proved simply too small to achieve the desired lowering of the dollar's share of foreign exchange reserves. Any new proposal needs to address these shortcomings.

This paper discusses two methods of measuring net foreign assets(NFA): directly using the financial account and indirectly using the current account. The former method is found to be more accurate than the latter method. The paper also includes a detailed discussion of the valuation methodology. The results show that China's NFA are much lower than the cumulative current account surplus or the cumulative foreign exchange reserves. This leads to an underestimation of growth in foreign direct investment and an overestimation of the capacity of foreign exchange reserves to cope with possible withdrawals. Therefore, the Chinese Government should pay more attention to valuation issues to obtain more accurate measurement of NF A. Meanwhile, the Chinese monetary authority should relax its control on the foreign exchange settlement system, allow the private sector to hold a certain amount of foreign exchange, and encourage foreign assets to be denominated in RMB to solve structural problems, including entity and currency mismatch.

The U.S. dollar is the central reference currency for international trade pricing and the main invoicing currency for primary commodities. This paper links these two observations within a stylized theoretical framework, and shows how to obtain a quantitative estimate of the gain to the U.S. economy when the dollar is a reference currency. With dollar invoicing of primary commodities, U.S. firms bear less exchange rate risk than foreign firms. This asymmetry leads to a dollar standard in international goods pricing. We then derive a simple analytical formula to calculate the gains and find that they are extremely small.

The governor of China's central bank recently revived a proposal for the creation of a ‘substitution account’, managed by the International Monetary Fund (IMF), into which central banks and governments could deposit dollar reserves in exchange for claims denominated in Special Drawing Rights (SDRs), the Fund's quasi-currency. This paper summarizes simulations that measure the potential cost of such an arrangement to the United States were it to guarantee the solvency of the account. The simulations show that those costs would be small relative to the size of US external assets and of the US economy. The paper also shows how the costs could be shared with the depositors. Creation of a substitution account could make the SDRs the principal reserve asset in the international monetary system, achieving a major reform of the reserve regime and enhancing the role of the International Monetary Fund.

The international community, in the form of the United Nations and, more recently, the G20, has committed itself to the Millennium Development Goals. The global financial crisis of 2008/9 served to increase the economic problems faced by low-income countries, making it much less likely that the goals will be attained. At the same time, the decision has been made to reactivate the SDR scheme by making a new allocation of SDRs in order to create additional international liquidity. This article explores the idea of linking SDR creation with the provision of development assistance. Although the idea of a link is not original, contemporary global economic and political circumstances may generate an environment particularly conducive to the acceptance of the proposal.

In the midst of the current global economic crisis, China's central bank governor came out with a proposal to reform the international monetary system based on special drawing rights, contrary to the general expectation of the international community. Although many believe the announcement was politically motivated to address the dollar problem, the reform idea may have important bearings upon the future evolution of the economic integration of Asia. This paper reviews the implications of the reform proposal for the Asian region.

In the aftermath of World War II, the dollar emerged as the uncontested leaderamong international currencies, a development of historic significance. In 1899,the share of the pound in known foreign exchange holdings of officialinstitutionshadbeenmorethantwicethetotalofthenextnearestcompetitors,the franc and the mark, and much greater than the dollar.

This paper examines the historical precedents of US exchange market intervention. Before 1934 we describe operations by the Second Bank of the United States, the US Treasury and the Federal Reserve. We then examine the operations of the Exchange Stabilization Fund, created in 1934 as a Treasury Department agency. Our study, based on unique, unpublished sources, analyses ESF dealings with the Banque de France and the Bank of England before and after the Tripartite Agreement of 1936. Finally, using unique data we discuss US efforts from 1961 through 1972 to defend the dollar's parity under the Bretton Woods System. Copyright © 2007 John Wiley & Sons, Ltd.

We consider what type of regional common currency should be introduced in East Asia in the future. The common currency basket is, in itself, more desirable as an anchor currency. In this paper we define two types of currency basket and investigate the long-term sustainability of adopting a common currency basket in East Asia. From our empirical results, a larger weight (but less than 100 percent) for the US dollar in the common currency basket tends to make bilateral exchange rates among East Asian countries stable in the long run.

The paper considers various possible means, mooted as alternatives or supplements to a simple schedule of governmental contributions, of paying for global public goods and common purposes: use of IMF Special Drawing Rights (SDRs); the United Kingdom's International Finance Facility (IFF); globally coordinated taxes (on arms exports, deep-ocean mineral rents, international air transport, greenhouse-gas emissions, or currency transactions) and the tapping of private fortunes. There is discussion of whether the various possible methods might have political advantages over a schedule of governmental contributions; of their revenue possibilities and of equity considerations. Promising, the paper argues, provided what are essentially prejudices can eventually be overcome, are first a global tax on currency transactions, and second the regular issue of SDRs, with those that would according to the allocation formula go to the rich countries recycled for development purposes. There is more doubt about the IFF, even if it were to receive sufficient support from the donor countries. It would probably need to be modified if it were to have much chance of being both workable and acceptable. Private fortunes on the face of it offer a huge potential; attention needs to be given to providing the right incentives; and it may be that they can be increasingly tapped for international development with the help of the new ‘global funds’. Copyright © 2004 John Wiley & Sons, Ltd.

This paper aims at analyzing exchange rates and trade patterns of Indonesia, Malaysia, the Philippines, Thailand, China, Korea, Singapore, and Taiwan in relation to Japan and the United States, with reference to the Asian currency crises in 1997. In order to analyze these issues, we constructed an international input-output model linked with macroeconometric models of the ten countries/regions. Analyses on the Asian exchange rates with a currency basket peg framework show that the Asian exchange rate policy was the de-facto dollar peg policy. As for trade patterns in relation to the yen-dollar rate; when a country/region's industrial structure is similar to that of Japan's and the yen is weak, the appropriate change of the yen's weight proves to hold its competitiveness. By contrast, the weak yen shows a decrease of its imports, regarding complementary structure. In either case, however, effects are limited.

The Asian crisis and the creation of the euro have jump-started once again discussion of exchange rate systems, currency areas, and international monetary reform. The role of power in the international monetary system is discussed and its relevance to analysis of the new euro area as an instigator of change in the power configuration of the system. The dollar, euro, and yen areas have achieved a high degree of price stability, but international efficiency is seriously undermined by exchange rate gyrations of these three currencies. The best path to international monetary reform leads through a new international currency called the INTOR based on a G-3 monetary union platform possibly linked to gold.

The third stage of the European Economic and Monetary Union (EMU) commenced on January 1, 1999 with the launch of the European single currency, the euro. The first round of participants comprises 11 of the 15 European Union (EU) nations, dubbed “Euroland.” The potential implications of EMU for Asia are immense. The euro's emergence as an international currency and its impact on Asia can be assessed in 3 different domains: (1) as a medium of exchange for Europe's trade with Asia; (2) as a store of value in stocks and bonds in world capital markets; and (3) as part of official foreign exchange reserves of Asian central banks. Our analysis suggests that there is potential for the euro to play a bigger role in EU-Asia trade links, which will be underpinned by the collective importance of Euroland as a much-enlarged trading and investment partner for Asia. However, in the short term at least, Asian equity markets are unlikely to benefit from significant inflows of capital from the EU as the former have been decimated by the region's financial crisis. As for Asian bond markets, rapid deterioration of sovereign ratings of countries in the region over the past 12 months would make it difficult for Asian companies to raise funds through euro-denominated debt instruments. As for official foreign exchange reserves, the bulk of Asian reserves is currently held in US dollar assets. Judging from Asian trade and debt figures, it seems unlikely that the euro would challenge the US dollar as a reserve currency any time in the near future. Nevertheless, in the longer term, the euro's introduction could make it easier for Asian central banks to diversify their reserves from the greenback to the euro. The internationalization of the euro is likely to happen only gradually, whether in terms of international trade denomination and settlement, denominating international financial assets, or as a reserve currency. Since the magnitude of shock that the single European currency would bring to the international monetary system is still unknown, only very tentative conclusions for the impact on Asian countries can be drawn at this point in time.

INTRODUCTION The dollar volume of U.S. imports has been increasing steadily for years. These increases have continued to occur in spite of public statements exhorting people to "buy American" and despite various economic downturns. For example, the U.S. Department of Commerce estimates that in 1990 the value of U.S. imports was $495 billion.|1~ This was the largest import volume in American history. Even the recession of 1991, the worst since World War II, had little impact on import volumes. The value of U.S. imports in 1991 was estimated by the commerce department to be $488 billion, only a 1.4 percent decrease from the previous year.|2~ Data from the first five months of 1992 show import volumes to be accumulating at another record pace. Not only are the dollar volumes of imports increasing, but more U.S. firms are purchasing goods from foreign sources. As firms place a strategic emphasis on cost reductions|3~ and purchased components and materials increase as a percentage of company sales,|4~ the effective management of foreign exchange will grow in importance. Research has demonstrated that fluctuations in currency values can erode the profitability of established products and markets when firms rely on imported materials to produce those products.|5~ Until the development of an international currency, the majority of international transactions will be exposed to currency changes. Currency exchange rate fluctuations will affect the prices paid, resulting in prices other than originally anticipated. Therefore, it is vital that a buyer in the international marketplace understand currency fluctuations and the underlying causes of these trends.|6~ For these reasons, academics and practitioners have recognized that the management of foreign exchange risk presents a challenging opportunity for cost reduction for firms that engage in foreign sourcing.|7~ Previous research has shown that there are three major approaches to foreign exchange risk management used by U.S. importers: (1) a "do nothing" approach, (2) a "passive" approach, and (3) an "active" approach.|8~ For an importer, a "do nothing" strategy converts all foreign currency cash outflows in the spot market as they occur. A "passive" approach is one which either (1) exchanges all anticipated outflows of foreign currency for domestic currency cash outflows in the forward or futures markets, thereby hedging all foreign exchange positions, (2) negotiates all sourcing contracts to require payment in U.S. dollars, thereby forcing the supplier to assume the foreign exchange risk, or (3) incorporates a risk sharing contractual agreement. ln contrast, an "active" approach is one in which the importing firm selectively hedges its foreign exchange rate positions based on exchange rate forecast information. This means that the firm may intentionally assume open positions in foreign exchange markets if it anticipates a favorable movement in the exchange rate. The primary purpose of the research reported in this article is to examine the performance of various approaches for managing foreign exchange risk. The study focuses on procurement contracts between U.S. and Japanese firms. U.S. and Japanese transactions were selected for examination because of the increasing importance of Japanese imports to the U.S. economy, the frequent use of the Japanese yen as a currency medium of payment, and the growing number of Japanese and American corporate alliances. Various strategies for foreign exchange management are examined using a simulation methodology. Eight simulation experiments were conducted, corresponding to four different exchange rate scenarios and two contract horizons, three months and six months, respectively. The simulation experiments encompassed thousands of U.S. and Japanese sourcing transactions over the period from January 1986 to December 1990. The first two experiments spanned a time period during which the U.S. dollar decreased in value relative to the Japanese yen. …

A number of writers have argued in recent years that massive international currency substitution has been a major cause of exchange rate volatility and monetary instability in the United States and other major countries. Such analysis is frequently coupled with recommendations for a return to pegged exchange rates. This paper critically examines the evidence presented for this currency substitution view. It argues that the weight of latest research suggests that direct international currency substitution has not been of major quantitative importance for the U.S. However, empirical evidence supports traditional views that international capital mobility can generate substantial short-run monetary interdependence even under flexible exchange rates. Thus, even though international currency substitution is of little importance to U.S. monetary conditions, a broader range of international considerations may be of considerable importance for the U.S. economy.

Now that the rate of interest on Special Drawing Rights (SDRs) on the International Monetary Fund (IMF) has been increased to a market-related level, what is the significance for developing countries of a link between the creation of SDRs and the provision of development finance, as has been urged in many quarters for a number of years? In addressing that question, this chapter challenges, in particular, any tendency to assume that as a result of the increase the establishment of a ‘link’ — the shorthand expression that will be used throughout — would be of little relevance to developing countries because of the supposed zero, or near zero, grant element associated with the use of SDRs.

The world currently faces a number of economic problems. These include the large global economic imbalances that may prove to be unsustainable; international poverty, where projections suggest that it is unlikely that the Millennium Development Goals will be achieved; and stalled multilateral trade talks that threaten a return to more aggressive protectionism. Although very unfashionable, a new allocation of Special Drawing Rights by the IMF could help to alleviate all of these problems. Clearly, it is most unlikely that one simple policy will resolve all the world’s economic ills, but, at the same time, if the benefits from it could be substantial and the costs minimal, it is worthy of consideration.

THE PLAN to create "Special Drawing Rights" (SDR's) involves a major change in the international monetary system. The systematic creation of reserve assets without a cost in real resources is unique in the history of international financial arrangements. The decision to base the allocation of SDR's among the participating countries on IMF quotas was basically one of expediency in facilitating the acceptance and ratification of the scheme. Once the decision was made to extend participation to the developing countries (UDC's) rather than to confine it to a select group of advanced countries, the only readily available formula was the IMF quota system. And the fact that a relatively small share of new SDR's would go to UDC's may well have been the price for acceptance by the developed countries. That more careful consideration was not given to the basis for distribution may be deemed an unfortunate necessity. This need not be the case, however, for future distributions of SDR's. The basic contention of this paper is that IMF quotas are not an appropriate basis upon which to allocate new international reserves in the future. While it is not our purpose to propose an "ideal" distribution formula, it will be argued that if certain relevant factors which conceptually should influence reserve distribution were given more weight, the structure of the distribution would be affected in a particular way. Furthermore, each of the factors considered would affect the structure of the allocation in the same direction, i.e., UDC's would generally receive a higher percentage. The following section briefly reviews reasons why IMF quotas are not a particularly relevant formula for distributing new reserve assets. Section III proposes two basic views of international reserves, and suggests how these concepts might be operationally approximated by various economic variables for purposes of developing more appropriate distribution formulae. Section IV analyzes the results of statistical tests designed to determine the extent to which IMF quotas reflect the variables of Section III, and compares alternative distributions resulting from different formulae with that under the IMF quota system. The final section summarizes the findings.

* This paper examines, from the financial manager's viewpoint, the risk and cost of bonds denominated in the Special Drawing Right (SDR), which consists of specified amounts of 16 major currencies. Floating exchange rates have forced investors and financial managers to be continually concerned with changes in exchange rates, rather than obtaining forward cover only when an official devaluation appeared imminent. The most difficult problems engendered by floating rates concern long-term investments; forward cover is unavailable for periods longer than 12 to 18 months, and long-term forecasts of exchange rates are subject to a wide range of error. In addition, Heckerman [5] has shown that hedging of a firm's balancesheet exposure is insufficient to protect against subsequent currency depreciation. One response to this problem has been long-term financing by means of the SDR.