Search

Special Drawing Rights are reserve assets which ought to provide liquidity in times of a country’s financial distress. It is a potential claim on freely usable currencies of International Monetary Fund member countries. This article examines the possible effects of a global Special Drawing Rights implementation by the International Monetary Fund in case of a collapse of one of the major currencies. The question addressed is if a distressed fiat currency can be bailed out effectively by triggering the designation mechanism to the International Monetary Fund member countries The results indicate that the liquidity benefit per created Special Drawing Rights unit would proportionally increase with the rate of money supply.

This chapter considers how a strengthened IMF could play a more central role in the international monetary system by reforms in its financial and operational responsibilities. The chapter examines, in particular, the changes that could be made to allow the IMF’s global reserve asset (SDRs or Special Drawing Rights) to become over time the principal reserve asset of the international monetary system, as intended when the Bretton Woods Agreement was revised in 1978. The chapter notes that this kind of reform would require strong agreement among the major shareholders in the Fund to overcome likely resistance on the part of the United States.

Since the foreign reserve is endogenously determined by each country, its identification is challenging. To overcome this difficulty, we utilize the special drawing rights (SDR) allocation of USD 650 billion by the International Monetary Fund to combat the coronavirus disease pandemic. Given the stylized fact that a sudden stop is likely to depreciate foreign exchange in a very short period, it is natural to expect the SDR allocation to mitigate the risk of devaluation, especially for emerging countries, which typically face a liquidity constraint. According to our empirical results, the increase in foreign reserves by the SDR allocation appreciates the exchange rate among emerging countries while depreciating foreign generally.

The stock of Target balances is recorded in the national accounting systems in the same way as international fiscal credit. A country’s Target claim is part of its net foreign asset position, and the increase of this claim is recorded as a public capital export. Intra-Eurosystem interest on Target balances is booked in the country’s current account in the same way as ordinary international interest payments. Target balances resemble not only the ISA balances of the US Federal Reserve System but also the special drawing rights of the IMF, Keynes’ bancor currency, Soviet transfer rubles, stocks of foreign currency in fixed exchange rate systems and the sovereign wealth portfolio accumulated by the Central Bank of Switzerland.

We present a general equilibrium model of the world economy where sovereigns face idiosyncratic risks and can default on their debt. In this model, the world interest rate is determined through the global financial market equilibrium, the amount of safe asset is endogenous and determines international risk sharing. Non-trivial multiple equilibria naturally arise, due to the endogeneity of the interest rate. These equilibria can be ranked according to their aggregate welfare, such that equilibria with a higher quantity of safe assets correspond to higher welfare. Due to a shortage in the safe asset supply, even the equilibrium with the highest welfare is not constrained-efficient. Finally, we prove that a world fund issuing a safe asset can reach the constrained-efficient aggregate welfare. With a standard calibration, the size of the fund is found to be around 4.1% of the world GDP. Its relationship with the Special Drawing Rights of the IMF is discussed.

To estimate the currency composition of China’s foreign exchange reserves and assess its effectiveness of management, the constrained least square method and variance sensitive analysis are utilized, respectively. Based on portfolio accounting identities, the change of foreign exchange reserves was decomposed into the net purchase change and the non-purchase change. The newly constructed non-purchase change was used to estimate the latent currency composition. Empirical results show that by the end of 2015Q1, China held about 63.6% of its reserves in the U.S. dollar, 19.6% in the euro, 3.09% in the Japanese yen, 4.89% in the pound sterling, 2.22% in the Canadian dollar, 2.03% in the Australian dollar, and 0.09% in the Swiss franc. Although the currency composition kept relatively stable, more attention had been paid to the emerging international currencies. China decreased the U.S. dollar share during the subprime crisis, while resorted to the portfolio rebalance strategy since 2011. The euro shar...

The objective of this paper is three-fold. First, the monetary and exchange rate regimes of the Asian countries are described and analyzed. The degrees of flexibility in exchange rates and capital controls vary across countries. Some countries have adopted a flexible inflation targeting framework, while others have pursued exchange rate targeting. The paper presents a new result of a tradeoff between price stability and exchange rate stability in the hyperbolic relationship of Asian countries. Second, a framework that analyzes and quantifies the degree of currency internationalization is proposed and applied to the RMB. In every indicator, the RMB’s weight in private-sector international finance has grown in the last several years, both in the private and public sectors. In the settlement role of currency, the RMB is ranked 8th in the BIS survey and 7th in SWIFT usage. This paper exploits data of a recent period when the RMB became de-pegged from the USD and show some of the emerging Asian currencies co-moving with the RMB, more so than the USD. In the official sector, RMB is also increasing its weight. The Chinese central bank has extended the currency-swap agreements with 30-some countries, so that the RMB can be used for trade finance and liquidity assistance. The RMB is adopted as a composition currency of the Special Drawing Rights (SDR), effective in October 2016, with 10.92%, ranking number 3, surpassing the JPY and GBP. Finally, potential impending changes in the Asian monetary and exchange rate regimes in Asia are discussed. Projecting the growth of the Chinese economy into the future, the weight of the RMB in the financial markets will increase globally as well as in Asia.

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.

Purpose The purpose of this paper is to consider the implicit effect of the underlying foreign currency exposure on the performance characteristics of country exchange traded funds. Design/methodology/approach To arrive at an overall estimation of the exchange-traded fund (ETF)’s tracking error, the mean of the three measures of tracking error was calculated for both the hedged (r_LC) and unhedged (r_NAV) return series. Since tracking error does not capture all the risk inherent in a country index fund, the study extends the analysis using the Sortino and Modified Sharpe ratios. Findings The decision to hedge currency risk should not be taken on the sole basis of historical volatilities. The investor must also factor in transactions costs, the possible roll of futures contracts and prevailing interest rate differentials. If the rate on the foreign currency is greater than the dollar (euro) rate, the investor will pay for the hedge. If the rate on the foreign currency is less than the dollar (euro) rate, the investor will gain on the trade. Given that hedging entails additional costs, in cases where the neutralization of currency volatility only reduces risk modestly, it would be advisable to leave the exchange rate risk unhedged. We propose two metrics for ETF investors deciding whether to hedge a country ETF’s underlying currency risk. Originality/value The results highlight a key finding: while the majority of country funds accurately track the performance of the underlying foreign index when measured in the local currency, returns in the fund currency can be much more volatile. In breaking down the sources of country fund volatility, the paper demonstrates the impact of the underlying currency movements on overall fund risk. In cases where the currency impact has a significant impact on fund tracking errors, an index-oriented investor benefits from neutralizing the exchange rate effect. Additionally, as the Sortino and Modified Sharpe measures suggest that the underlying currency exposure offers in most cases a better risk-adjusted return for country exchange-traded funds (ETFs) in the listing currency, we also calculate the risk minimizing foreign currency exposure for each fund and propose a decision rule based on the net currency variance to decide whether to hedge the ETF’s currency risk. The optimal hedge ratio indicates that US-based investors should only partially hedge the underlying currency risk while European-based investors are better off fully hedging currency risk.

This study examines the determinants of gold demand in central bank's foreign exchange reserves portfolio by using a panel data set of over 100 nations for 1998–2014. I find gold's US dollar and inflation-hedge properties as well as higher exchange rate risk and monetary policy instability to significantly increase central bank's gold holdings while higher economic growth and financial development to reduce such share. Moreover, the recent global financial crisis caused central banks to increase this share. The results imply the rationale for holding gold in central banks’ reserves is actually not different than hedge fund managers or individual investors.

The relationship between major East Asian economies' international reserves and internationalization of their currencies presents a seeming paradox in international finance. While large international reserves may be expected to foster more widespread global use of a currency, strong growth of international reserves has been associated with very low Asian currency internationalization. Using the generalized method of moments (GMM) estimator we show the overall size of the Bank of Japan's international reserves, as well as the ratio of its foreign exchange reserves to international reserves, are negatively related to yen internationalization, while gold reserves and special drawing rights are positively related.

The paper analyses the official use of international currencies as reserve currency (store of value) and anchor currency (unit of account). Examining the role as a reserve currency we note that the US dollar is the main reserve currency even if it recorded a decline given the decrease of the value of the US dollar reserve holdings and the gradual diversification of the currencies used. Since 2010, the euro's share decreased continuously may be due to the Eurozone crisis and the euro's depreciation against the US dollar. Then we show that the US dollar dominates as an anchor currency, though it was temporary abandoned during crisis time, having more than a regional dimension. At the same time, the use of the euro in exchange rate arrangements appears mainly in the regions that have close links with the euro area. Over the last few years, we have witnessed a gentle orientation towards a multimonetary world, especially regarding the use of the international currencies as reserve currency given the diversification of the currencies in which central banks understand to hold international reserves and the increasing share of the nontraditional currencies in total foreign exchange reserves.

With globalization and financialization, exchange rates could be sensitive to oil price shocks. Due to differences of exchange rate policy, oil-dependence status, and other factors, the responses of exchange rates to oil price shocks could be either similar or heterogeneous. Therefore, in this paper, we integrate a hybrid research framework to investigate the co-movement of responses to oil price shocks of four major exchange rate of currencies included in the Special Drawing Rights basket from January 2000 to September 2018 from a time varying aspect and considering the asymmetric effect of the oil price shocks. The main results are as follows, compared with the general oil price shocks, unexpected oil price shocks could have greater influence on currency markets over time, with the asymmetric effect happening only when extreme market situations and unexpected oil price shocks appear simultaneously; pairwise exchange rates tend to move in either a negatively or a positively similar way, rather than in an unrelated manner; in 50% of the sampled market time, the co-movement situation of exchange rates' response could be captured by specific small numbers of co-movement modes, with the Euro/US dollar (USD) and Great British Pound/USD tending to co-move in more stable manner and having the potential to serve as an early warning of risk, while other pairwise exchange rates are characterized by time varying features.

The International Monetary Fund’s decision in 2015 to add the Renminbi to its Special Drawing Rights currency basket has in effect granted the Chinese Yuan the international reserve currency status. This study revisits China’s five exchange rate regimes in 2005-2015 and investigates the relationships among the currencies of the Chinese Yuan, the U.S. Dollar and the Euro. The Log-Periodic Power Law Singularity model is proposed as a generic parameterization to capture the super-exponential behavior in the tetrad of exchange rates of these currency pairs. The transient non-sustainable faster-than-exponential acceleration of the “CNY against USD” from August 2005 to July 2008 suggests the existence of an apparent bubble with an under-valuation. The clustered signals of LPPLS Confidence indicators for the “CNY against USD” from May 2011 to March 2012 suggest the termination of its long-term growth. The signals for the “EUR against USD” and “CNY against EUR” emerging from January 2014 to August 2015 show a tightly coupled relationship among these currency pairs. Moreover, the empirical estimates of the most possible critical time by the standard Ordinary Least Squares method and the Quantile Regression method for the time series of “CNY against USD” tends to be later than that of “CNY against EUR” in the five regimes.

Following the global financial crisis (GFC) in 2007, questions have been raised regarding the prospect of the US dollar continuing its dominance as the principal reserve currency. The increased volatility of the US dollar exchange rate and the uncertain sustainability of the US economic growth since that time have created pressure for central banks around the globe to shift their US dollar reserve holdings to other currencies. Amongst the major reserve currencies, the euro has been considered by a number of central banks to be an alternative currency to the US dollar. In light of the above considerations, this paper aims to present an empirical analysis on the different transaction factors that affect the currency composition holding of the reserve currencies held by the central bank of Australia, the Reserve Bank of Australia (RBA).

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.

The collapse of the international monetary system of Bretton Woods ended the period of common use of unified exchange rate system. Current, so-called non-system, is not providing stability in currency relations, which is mainly due to the high volatility of exchange rates. Implementing changes is inevitable. While the unification of exchange rates on an international scale appears to be currently impossible, alike the return to the gold standard, noteworthy is the idea of implementing a global currency, which would be an effective replacement for the US dollar as an international currency. SDRs, based on the rearranged currency basket that include the currencies of developing countries, could successfully play the role of such currency.

Since the Bretton Woods Agreement, the U.S. dollar has played the role of dominant global currency. As a result, the Federal Reserve Bank has many privileges such as the ability to run trade deficits without foreign exchange reserves. In the world, foreign exchange rates of currencies are quoted against the dollar, and majority of currency trading involves the dollar. Besides, international trade in primary commodities, such as oil, wheat, gold and coffee are bought and sold in U.S. dollar. The central banks of countries hold major positions of their international reserves in dollars. Any changes in its interest rates automatically alter the revenues of all world assets. With deregulated financial markets, the spillover effects of the Federal Reserve Bank’s decisions have increased. In this paper, we examine the impacts of Federal Reserve Bank policies over the Fragile Five that is a sub group of the weaker emerging markets namely Brazil, India, Indonesia, South Africa and Turkey. We are mainly focusing on the consequences of changes in Fed’s policies on the fragile five’s basic indicators; exchange rate, interest rate, and the stock exchange indices. All Fragile Five currencies have been depreciated by about 10 to 25% after the Fed tapering decisions. In addition we test for mean and volatility spillover of Wall Street on stock exchange indices of the Fragile Five in GARCH in mean framework and document the existence of such spillovers in almost all cases.

This chapter revisits the history of the origins, operation and demise of the Bretton Woods International Monetary System. The Bretton Woods system was created by the !944 Articles of Agreement to design a new international monetary order for the post war at a global conference organized by the US Treasury at the Mount Washington Hotel in Bretton Woods ,New Hampshire at the height of World War II. The Articles represented a compromise between the American plan of Harry Dexter White and the British plan of John Maynard Keynes. The compromise created an adjustable peg system based on the US dollar convertible into gold at $35 per ounce along with capital controls. It was designed to combine the advantages of fixed exchange rates of the pre World War I gold standard with some flexibility to handle large real shocks. The compromise gave members both exchange rate stability and the independence for their monetary authorities to maintain full employment. It took over a decade for the fully current account convertible system to get started. The system only lasted for 12 years from 1959 to 1971 but it did deliver remarkable economic performance. The BWS evolved into a gold dollar standard which depended on the US monetary authorities following sound low inflation policies. As the System evolved it faced the same severe fundamental problems as in the interwar gold exchange standard of: adjustment, confidence and liquidity. The adjustment problem meant that member countries with balance of payments deficits, in the face of nominal rigidities, ran the gauntlet between currency crises and recessions. Surplus countries had to sterilize dollar inflows to prevent inflation. The U.S. as center country faced the Triffin dilemma. With the growth of trade and income member countries held more and more dollars instead of scarce gold as reserves generated by a growing US balance of payments deficit. As outstanding dollar liabilities grew relative to the US monetary gold stock confidence in the dollar would wane raising the likelihood of a run on Fort Knox.This led to the possibility that the US would follow tight financial policies to reduce the deficit thereby starving the rest of the world of needed liquidity leading to global deflation and depression as occurred in the 1930s. Enormous efforts by the US, the G10 and international institutions were devoted to solving this problem. As it turned out, after 1965 the key problem facing the global economy was inflation, not deflation, reflecting expansionary Federal Reserve policies to finance the Vietnam war and the Great Inflation. US inflation was exported through the balance of payments to the surplus countries of Europe and Japan leading them in 1971 to begin converting their outstanding dollar holdings into gold. In reaction President Richard Nixon closed the US gold window ending the BWS.

A strand of literature has focused on inferring the weights of the anchor currencies in a country’s currency basket. With the growing importance of China’s economy, there has been a surging research interest in the role of the renminbi as an international anchor currency and in China’s de facto exchange rate regime. In this article, we show by a simple model and demonstrate using the observed data on the Special Drawing Rights basket that the correct specification to estimate the weights of anchor currencies in a currency basket is to use the rates of change in exchange rates and to write exchange rates in quantity term. When one is to estimate the structure of a currency basket, close attention should be paid to using the rates of change or the levels of exchange rates as well as writing exchange rates in quantity or price term.

Development of the national monetary system necessitates the ensuring of stability of the national monetary system. This is explained by the fact that the national currency system has a direct impact on the competitiveness of the national economy, on the export potential of the country and the living standard of the population. Appreciation of the real exchange rate would cause the rising of export cost and artificially overvalued exchange rate will provoke the emergence of excessive demand for foreign currencies in the country. Moreover, relatively high devaluation level of national currency would negatively affect the efficiency of financed investment projects. This article analyzes the current state of monetary system of the Republic of Uzbekistan, identifies the current problems and proposes scientific and practical solutions to identified problems. In particular, the author justifies the need for the transfer of all foreign exchange reserves of the state to the balance sheet of the Central Bank with the right to self& governance within the fr amework of monetary policy. Increasing the diversification level of foreign exchange reserves of the Central Bank is proposed by restructuring the currency framework of external debt of the Government of Uzbekistan.

This paper examines whether the international role of the dollar as main global reserve currency has contributed to persistent current account imbalances. To this end, we analyse how central banks' accumulation of reserve assets affects the current account balance of both reserve-accumulating and reserve-providing countries. Based on a simple portfolio balance model we show theoretically that the global demand for reserve assets by central banks may lower the current account balance of the reserve-issuing country. Our panel data analysis over the period 1970–2009 confirms this hypothesis: Any dollar of provided reserve assets decreases the US current account by more than one dollar. On average, the demand for dollar reserves has lowered the US current account by 1–2 percentage points relative to GDP. The flip side of this effect is a higher current account balance in reserve-accumulating countries. These novel findings show that the worldwide demand for international reserves has contributed to the buildup of global imbalances.

In introducing a two-tier foreign exchange market under the Bretton Woods system, the Belgian monetary authorities aimed to insulate the domestic currency from (speculative) capital flows. By thus escaping the macroeconomic trilemma, they should have been able in practice to avoid taking account of foreign exchange developments in the determination of the monetary policy interest rate. The goal of this paper is to test this assumption empirically. Using a Taylor-rule approach, the paper shows that towards the collapse of the Bretton Woods system the volatility of the spread between the two segments of the foreign exchange market played a growing role in the determination of the monetary policy interest rate. © 2013 The Author.

The main goal of the paper is to examine the key features of the current international monetary system and provide an overview of scenarios for the future global monetary arrangements. It is noted that just a few years back there seemed to be a bipolar monetary system based on the U.S. dollar and the euro in the making. The rise of China and the possible emergence of the Chinese renminbi as an international currency gave way to a debate on a tripolar monetary system. Today, the future of the international monetary system is still open. It needs reforming in order to meet the requirements of the new global order with multiple growth centers, the growing role of transnational actors, and the increasing global influence of the major emerging economies.The analysis reveals that the relations among the major international currencies are changing, and today at least three scenarios for the future monetary order seem possible. These are the maintenance of the U.S. dollar domination, a shift towards a multipolar currency order, and the gradual regionalization of the currency order. The concept of a single currency – though theoretically attracting – seems impossible to be implemented in the foreseeable future. The analysis is based on monetary and economic theories, historical patterns of the development of monetary regimes, and an extensive literature overview backed by the data provided by the International Monetary Fund (IMF) and the Bank for International Settlements (BIS).

The US dollar gained the status of the world's reserve currency in the Bretton Woods system and has preserved it until the present day. Such position in international finance entails both advantages and disadvantages to the USA as the issuer of this currency, and to the rest of the world using it in trading, as store of value, and for the purpose of various financial operations and transactions. After the collapse of the Bretton Woods system, the regime of fixed FX rates was replaced by floating FX rates. Yet, regardless of this change, the dollar kept its role of the world's reserve currency. Numerous banking and currency crises following the transfer to the floating FX rates regime, along with the shifts in international capital flows, forced the developing countries and countries in transition to increase their FX reserves. In the tendency to store their value, central banks usually invest them into US Treasury securities, as liquid and reliable assets. However, due to the risk incurred by the reliance on a single national currency in the role of the world's reserve currency, there have been many proposals to reform the international monetary system. According to the current global tendencies, the most serious candidates for acquiring the status of the world's reserve currency in the future are the dollar, the euro, and the Chinese yuan.

Using a unique dataset on daily foreign exchange intervention and a new methodological framework of a latent factor model of central bank intervention, this paper addresses the effects of intervention in an emerging market. Events in financial markets from 2002 to 2010 provide a natural experiment to evaluate the short and medium term objectives of the central bank to contain excessive exchange rate volatility and to accumulate foreign reserves respectively. In the low volatility period in the first part of the sample, the central bank is successful in influencing the currency when pressure is to appreciate, accumulating international reserves. The same model estimated for the global volatility period in the second part of the sample shows the central bank intervening to mitigate excessive exchange rate volatility in line with the short-term objective. The results point to the need to consider the cross currency market interdependence between emerging markets when modeling intervention.

We empirically investigate whether reserve currency preferences have been a source of stability for the international monetary system. Our findings suggest that reserve-hoarding countries, especially the emerging/developing countries, tend to adopt a stabilizing diversification strategy in their reserve portfolio allocation, buying (selling) assets denominated in depreciated (appreciated) currency. The result is robust to both International Monetary Fund and Bank for International Settlements measures of quantity changes of reserve shares. The stabilizing diversification strategy reveals the fact that reserve-hoarding countries may fall into a "dollar trap," and escaping from it may cause more valuation loss of their existing reserve portfolios.

The international reserve regime based mainly on the US dollar has served the world well for decades, but it faces an uncertain future as the economic hegemony of the United States is increasingly challenged by the emergence of new economic powers. The regime is flawed fundamentally, moreover, because additions to the supply of the main reserve asset require the United States to run balance-of -payments deficits, which tend to undermine confidence in the dollar. This paper proposes a transformation of the reserve regime that would cause Special Drawing Rights (SDRs) issued by the International Monetary Fund to become the main reserve asset. An orderly transition would be achieved by creating a Substitution Account into which official holders of dollars could deposit them in exchange for SDRs.

Summary/Zusammenfassung The Economics of Systemic Disorder: Roots of and Remedies for Unsustainable Monetary Imbalances What are the principal steps to a truly new international economic order, which would structurally eradicate global monetary imbalances, namely crises due to the intrinsic properties of the current economic system? Why should an international currency unit (f. i. the “renewed” Special Drawing Rights (SDR)) issued by a so called “Central Bank of Central Banks” (f. i. the “reformed” International Monetary Fund (IMF)) cure many sources of disorders and structural imbalances? The article deals precisely with these ‘evergreen’ concerns from an innovative methodological as well as argumentative perspective. In the last sections, we analyze the intrinsic faults of the Euro Area case and focus on the impact of the Euro currency in terms of wide spreading trade, growth and debt imbalances. As we will see, the durability of the Eurozone as a whole is threatened not only by the intrinsic faults of ...

The stabilization programs of the International Monetary Fund (IMF)—which are often designed to prevent currency crashes and promote exchange rate stability—frequently fail to prevent currency crises in program-recipient developing countries. This leads to the following puzzle: when do IMF programs fail to prevent currency crises in developing states that turn to the Fund for assistance? We suggest that the likelihood that a currency crisis may occur under an IMF program depends on the market concentration of public sector banks in program-participating developing countries: the higher the market concentration of public banks in a program recipient nation, the more likely that the IMF program will be associated with a currency crisis. Specifically, if the market concentration of public banks in a program-participating developing country is high, then banks will compel the government to renege on its commitment to implement banking sector reforms. This induces a financial panic among investors that leads t...

Objectives: The research is aimed at extending the holistic theoretical concept of genesis and development of the global foreign exchange market. It also presents guidelines to reorganize the world monetary system, as well as a rationale for the author’s view of a place and a role of gold on the today’s world currency market (in terms of uncertainty). Methods/ Analysis: Considering the methodological issues within the examined problem, the authors were supported by principles of the modern economic theory. The research was based on the system analysis; specific problems were solved with the help of the comparative, statistical and graphical analyses, using ranking and clustering methods. Results: The paper has presented an analysis for the current situation with the reserve currency, the US dollar, and given ideas of its possible reorientation towards gold as a more stable reserve asset in the global financial and currency markets. The authors have concluded that in the current conditions in the global foreign exchange market, there is no alternative to the existing reserve currency, the US dollar, but there is an opportunity to return the gold or e-gold as a reserve currency or a currency unit of account as a basic element within the global monetary system. Novelty/Improvements: There are the authors’ views on the current state of gold in the world and national monetary systems; the possibility has been proven to return the functions of the world’s money and a single international payment instrument to gold.

The fast increase of foreign exchange reserve in developing countries has raised a number of important financial questions in recent years. The analysis of the optimal scale of the foreign exchange reserve can provide important indicator to measure the strength and stability of country’s financial standing. In this work we propose a cost-profit model and use the financial data during 2000 to 2008 to analyze the optimal scale of China’s foreign exchange reserve. We identify a number of financial factors to measure the cost and profit of holding the reserves. Our prediction suggested that China’s foreign exchange reserves were still within the moderate range in 1999–2001. However, during 2002–2008 the foreign exchange reserve began to exceed the appropriate scale, and this upward trend was accelerated each year.

This study tests whether international reserve accumulation is inflationary because of moral hazard and incentive effects. We use the 2009 allocation of Special Drawing Rights (SDR) as a natural experiment to trace the effect of an exogenous nonmonetary shock on International Monetary Fund members' reserve holdings. In countries that received large SDR allocations, inflation was about half a percentage point higher in the 2 years following the allocation, controlling for other standard determinants. This effect is commensurate with the size of these countries' discretionary fiscal deficits. This result is consistent with the hypothesis that reserve accumulation may be inflationary because of incentive effects.

Chey, Hyoung-kyu. (2012) Theories of International Currencies and the Future of the World Monetary Order. International Studies Review, doi: 10.1111/j.1468-2486.2012.01104.x The international standings of currencies form a principal characteristic of the international monetary order, shaping the world economic and political system by influencing the economic and political relationships among countries. This paper provides a systematic review of the literature on international currencies, encompassing both economics and political science, with the aim of providing useful groundwork to help develop a better analytical framework for the study of international currency standing. In particular, this paper discusses the international currency concept, the benefits and costs of issuing an international currency, and the determinants of international currency standing. It also assesses conflicting prospects for the future of the US dollar as the world’s key currency, addressing the likelihoods of further internationalization of the euro and the renminbi, the dollar’s main potential rivals. It in addition calls attention to certain political economy factors as salient issues for the future study of international currency standing.

For quite some time the international monetary system has been incapable of deliv-ering external balances or facilitating smooth adjustments of large imbalances. Thereis a convergence of interests for the status quo: the United States is keen to preservethe benefits it receives as the key-currency country, while creditor countries continueto accumulate dollar-denominated assets and sterilize increases in the foreign com-ponent of the monetary base. This special issue of Open Economies Review revisitsthe mechanism of the existing international monetary system and, in the process,highlights what is not working and what could be done to fix it. The planning of theissue took place in 2010, after the subprime financial crisis but before the onset of thesovereign debt crisis. The severity of the latter and the potential that its resolutionmay lead to a break-up of the euro area underscores the fragility of the internationalmonetary system and the urgency to reform it. In what follows I concentrate on threemain issues: competition among international currencies, the deteriorating dollarstandard and Special Drawing Rights, and rules and burden sharing of externaladjustment.1 International CurrenciesNational currencies tend to dominate foreign currencies as means of exchange partlybecause the bulk of transactions is local and partly because governments discriminatein favor of the currency they issue. Currency substitution — the replacement ofdomestic money with a (better) foreign money — is a slow process even when it is

We analytically derive optimal central bank portfolios in a minimum variance framework with two assets and transaction demands caused by sudden stops in capital inflows. In this model, transaction demands become less important relative to traditional portfolio objectives as debt to reserve ratios decrease. We empirically estimate optimal dollar and euro shares for 23 emerging market countries and find that optimal reserve portfolios are dominated by anchor currencies and, at current debt-to-reserve ratios, introducing transaction demand has a relatively modest effect for most countries. We find that, in general, the dollar acts as a safe haven currency during sudden stops for country specific and global sudden stops, increasing the optimal share of dollar bonds in central bank portfolios. Correspondingly, our model predicts that dollar shares should decline as debt-to-reserve ratios fall, as observed in recent data. We also find that the denomination of foreign currency debt has little importance for optimal reserve portfolios.

The global financial system appears to be heading for a new crisis, triggered in large part by growing and unsustainable levels of global debt. Reserve currencies are an essential element of the world's current financial infrastructure, and are widely recognized for their role in facilitating international transactions. History has taught us that such currencies are also quite transient, being subject to adjustments and changes as economic conditions evolve over time. The United States dollar now serves as the de facto world's reserve currency. However, this is unlikely to continue unchallenged and unchanged into the future. The G20 and the International Monetary Fund IMF appear to be now considering a reserve currency, such as the Special Drawing Rights SDR, which is obtained through participation of many currencies. The major question is not what will become the new global reserve currency, but how this new currency will be managed. One of the critical issues associated with this currency management effort is that of determining the information systems architecture that will be required, including whether an associated Service Oriented Architecture SOA would be helpful in managing this new global currency. An extremely important element in this currency determination activity is a strong governance protocol that all the governments and sovereigns will accept and comply with. Otherwise any new global reserve currency, regardless of whether it is associated with a major information systems architecture foundation, will likely be unsustainable. In this paper, we examine these issues.

This paper provides an evaluation on the global reserve currency status of U.S. dollar and the debates on reserve currencies. This evaluation involves the examination of some quantitative data concerning the economic facts of the leading countries, the currency composition of foreign exchange holdings in the world and the official reserve assets of the major reserve-accumulating countries. Furthermore it calls attention to the criticisms towards the viability of the dollar as a global reserve currency and analyzes the suggestions and ideas proposed by countries and county groups.

Since monetary policy is constrained in fixed exchange rate regimes, we should observe fewer banking crises due to moral hazard in countries with credible currency pegs. However, three countries with seemingly credible pegs in the nineteen-eighties and -nineties, namely China, Hong Kong and Argentina, still suffered crises in their domestic banking sectors. The present note illustrates that bank incentives to take on excess risk still exist in countries with currency peg credibility and that the size of that risk exposure (and thus the potential for crisis) may be positively related to the level of central bank foreign exchange reserves.

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.

In this paper, we argue that the current international monetary system is fully asymmetric, as it divides the world among reserve issuing economies (RIEs) and reserve earning economies (REEs). Thus, monetary theory, we argue, should take into account whether or not the central bank issues an international reserve currency, as that would largely determine its balance sheet structure, interest rate-targeting procedure, and the elasticity of monetary policy and of the exchange rate regime. The reason is plain: as opposed to RIEs, the central bank in REEs must target a minimum stock of foreign currency assets, as the local currency does not circulate abroad.

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.

Historical experience is often invoked in the modern debate on competition among reserve currencies, yet little is known about quantitative aspects or institutional features of reserve management. By drawing on newly obtained data on foreign exchange reserves, especially those broken down by currency, this article explores the competition between the British pound sterling and the US dollar for the status of leading reserve currency in Japan during the interwar period. We find that competition between these two currencies remained undecided and that their relative status alternated repeatedly. Historical materials and the results of econometric analysis suggest that the key factors explaining a choice of reserve currencies are trade volumes and the currency denomination of external debt. The latter criteria supported maintaining sterling's status as a reserve currency for the interwar period, reflecting its considerable share in debt service generated through issues that had been launched when London was the sole international market. The stability of potential reserve currencies is shown to be crucial as well. We also find evidence of institutional factors, which include taxation, foreign exchange controls and restrictions on financial activities.

This article challenges the conventional view that the gold standard was stabilized by quasi-automatic central bank intervention and/or private arbitrage whenever the spot exchange rate reached the ‘gold points’. New archival evidence on the central bank of Austria–Hungary between 1896 and 1913 documents the use of sophisticated instruments such as foreign exchange forward and repo (sale-repurchase) contracts and a quest for market dominance both with respect to reserves held and the share in market turnover. The resulting change in the working of the foreign exchange market is shown to have supported the conduct of monetary policy, underlining the importance of market micro structure in the design and conduct of monetary policy. The picture that emerges is that of a much more ‘modern’ approach to exchange rate stabilization during the classical gold standard than is traditionally recognized.

Hong Kong SAR is well known as one of the few economies to operate a form of currency board as the basis of its monetary system. This system arose out of colonial status and has been retained except for a period of floating from 1975-83 to the present day, with some amendments. This article explores the evolution of the Exchange Fund during a period of global exchange rate instability showing that the abandonment of the monetary anchor in 1975 was part of a series of innovations to the use of the Fund as the colonial government sought to manage the exchange rate risks posed by the collapse of the Bretton Woods system.