Prospects for the Evolution of Global Reserves

• Author(s): Graham Bird • Published: September 2011
• Pages in paper: 22


Abstract

The global reserve system has returned to the top of the agenda in debates about international monetary reform. Much of the contemporary discussion draws on familiar issues but it has been given a new relevance in the aftermath of the global financial crisis of 2008/09. One particular focus relates to the composition of international reserve assets and the role of the dollar. Will the dollar’s preeminent position be eroded and will the dollar be replaced by other international currencies? This paper examines the factors that determine a currency’s international status and assesses various candidate currencies including the euro and the Chinese renminbi. It also analyses the Special Drawing Right (SDR ) as an international reserve asset. It concludes that, while there may be advantages in enhancing the SDR ’s role and endeavouring to implement the commitment made in the Second Amendment to the IMF’s Articles of Agreement to encourage it to become the world’s principal international reserve asset, the more likely outcome is that the dollar will retain its status as the main international currency, although it may be joined by other currencies in a multiple currency system.



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IMF Programmes: Is there a conditionality Laffer Curve?
Author: Graham Bird

The long-standing debate over IMF conditionality has received a new lease of life in the context of the debate over a new international financial architecture. Conditionality has increased in recent years and some proposals for reform envisage a continuation of this trend. However, by emphasising the importance of implementation as well as design it may be argued that increased conditionality will have a negative effect on final out-turns; there may be a conditionality Laffer curve. The policy issue is whether conditionality has reached or gone beyond its optimal level. There is some evidence that is consistent with the claim that conditionality has become excessive.

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Is Dollarisation a Viable Option for Latin America?
Author: Graham Bird

In the aftermath of the East Asian financial crisis there has been much discussion of exchange rate policy in developing countries. Some observers have suggested that they should opt either for flexible exchange rates or for firmly fixed rates. Adopting the US dollar as legal tender and abandoning the domestic currency is one possibility. In conditions of economic crisis Ecuador dollarised in early 2000. Will other Latin American economies follow or will Ecuador live to regret the decision? This article assesses the arguments.

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Sins of the Commission
Author: Graham Bird

In the aftermath of the East Asian financial crisis there has been much discussion of a new international financial architecture. A significant contribution to this debate is the Report of the International Financial Institution Advisory Commission, sponsored by the US Congress, which was chaired by Allan Meltzer and published in March 2000. The Commission makes a number of radical proposals for reform. Professor Bird argues that unfortunately the analysis underlying many of them is flawed, or at least highly dubious. Reform based on the Commission’s recommendations would therefore be largely ill-directed; it would be bad news for developing countries and countries in transition, and could lead to greater global instability. An alternative approach to reform exists which attempts to modify the IFI’s operations in ways that build on the lessons of experience rather than simply discontinues them, as the Meltzer Commission recommends.

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Is there a Case for an Asian Monetary Fund?

The East Asian financial crisis has spawned a number of proposals for institutional reform. Some envisage reforming existing institutions, particularly the International Monetary Fund (IMF), while others suggest that new institutions are needed. Amongst them is the idea of establishing an Asian Monetary Fund (AMF). Evaluating this proposal raises a number of complex issues. Its appeal hinges on whether it would be able to undertake some functions better than the IMF. To the extent that crises are regionally contained, there may be a case for mobilising finance to help deal with them at the regional level. This could also take pressure off the constrained resources of the IMF. In as much as access to finance from an AMF would be conditional upon compliance with specified standards and policy guidelines, an AMF might also help to prevent a future financial crisis in the region.

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