WHAT INTERNATIONAL MONETARY SYSTEM FOR A FAST-CHANGING WORLD ECONOMY?
AGNÈS BÉNASSY-QUÉRÉ* AND JEAN PISANI-FERRY**
"...As for the unit-of-account functions, the dollar remains key for commodity and energy markets, although it is less the case for manufacturing trade. It also remains key for monetary anchoring. For example, Bénassy-Quéré et al (2006) have estimated that, from 1999-2004, 92 percent of a sample of 59 currencies were de facto pegged. Among them, 56 percent were pegged to the US dollar, 14 percent to the euro and 22 percent to a basket.6 For 2007, Goldberg (2010) finds that out of 207 countries, 96 were either dollarised or had their currency pegged to the dollar and another eight were in a managed float against the dollar, resulting in 36 percent of non-US world GDP being linked to the dollar. If the US share in world GDP is included (25% in 2007), this “dollar area” accounts for more than 60% of the world economy.
This predominance of the dollar as an anchor currency is confirmed by Figure 1 which plots on the Xaxis a country’s ratio of trade with the EU to trade with the US and on the Y-axis the exchange rate alignment index of Cobham (2008). It is apparent that countries tend to peg to the currency of the country they trade with most. However, many countries exhibit an odd dollar habitat (meaning they trade more with the EU but align more to the US dollar) whereas there is only one example of the reverse situation. This is evidence of the importance of the “Bretton Woods 2” regime of Dooley et al (2003) and also confirms that the euro is still a regional, rather than a global currency (Pisani-Ferry and Posen, 2009)
On the whole, the dollar remains the main pivotal currency for all three monetary functions – means of payment, unit of account, store of value. It is true that most of the advanced economies and a group of emerging countries, most of which adopted in the 2000s some variant of inflation targeting strategies,7 have severed direct links with the US dollar through the pegging of the exchange rate or the accumulation of foreign exchange reserves. But even these countries proved to be dependent on the Federal Reserve for liquidity provision at the height of the crisis, despite the emergence of regional arrangements and the extension of IMF facilities. Although neglected in more tranquil times, the dollar reclaimed its position during the crisis, proving that it was still the keystone in the international monetary system...."
[Mrt: an interesting view]
[Mrt: an accident find about the SDR]
"The creation of the SDR in 1969 came after several years of international discussions, especially amongst the "Group of Ten" - a group of ten advanced countries (the US, Japan and eight European countries) represented by their finance ministers, Treasury heads or central bank governors (see Solomon, 1996).
After the war, U.S. holdings accounted for about 60% the world’s reserves of gold. The dollar/gold equivalence and the Marshall Plan, which provided dollar funding to European countries, allowed the relative scarcity of gold to be circumvented. However, the pace of gold production in the world was not consistent with the value of the peg. In the early 1960s, in order to address the problem of scarcity, the central banks of the U.S. and of European countries agreed on a pooling of gold reserves. Under the terms of the agreement, the participating countries were required to intervene if the market price departed from 35 dollars an ounce. However, the cost of these interventions steadily increased. The United States’ privilege as the issuer of the main international currency was also met with the hostility of Charles de Gaulle. After the pound was devalued in 1967, and given the risk of a dollar devaluation because of the Vietnam War, investors converted their dollars into gold, making the 35 dollar an ounce parity increasingly difficult to uphold. The gold pool ceased its functions in 1968. The parity of 35 dollar an ounce was maintained for official transactions, but private transactions were carried out on the basis of a higher market price. This amounted to a de facto devaluation of the dollar, while the problem of international liquidity – based US capital exports – remained unsolved.
The SDR was created by the Fund to serve as a reserve asset. It can be seen either as a substitute for gold (and a competitor to the dollar), or simply a mechanism for managing global liquidity independently of the United States’ current account. In 1978, the member states of the IMF agreed to make the SDR the “principal reserve asset of the international monetary fund” via an amendment to the Fund’s statutes. More than thirty years later, however, the SDR has failed to reach its objectives as a unit of account and as a store of value.
Unit of Account
Initially set at 0.888671 grams of fine gold (on par with the official value of the dollar), the value of the SDR had to be redefined after the end of the Bretton Woods regime. In 1974, the SDR was redefined as a basket of 16 currencies, those of the member states that accounted for at least 1% of world trade. The basket was reduced to five currencies in 1981 (dollar, yen, pound sterling, Deutschemark, French franc), and in 1999 the franc and the mark were replaced by the euro. In 2001, the criterion for inclusion in the basket was changed. The currencies included in the basket were to be those of the biggest exporters, but also those most widely used in trade invoicing. This last criterion is currently an impediment to the inclusion of the renminbi in the basket.
The value of the SDR is determined daily by the IMF, according to the price of its component currencies and their weights within the basket. By construction, the DTS is more stable than its component currencies. However, to this day it is not used as the unit of account outside of the IMF and central banking.
Store of value
The second objective of the SDR was to free international liquidity of its reliance on U.S. economic policy. Three allocations were made between 1970 and 1972, amounting to a total of 9.3 billion SDR. In the years that followed, liquidity disappeared from the concerns of national governments, as the United States was running large current account deficits in a context of high inflation. New allocations amounting to SDR 12.1 billion took place between 1978 and 1981, and then nothing happened until the global financial crisis of 2007-09 and the decision of the G20 (London summit April 2009) to undertake a massive allocation of SDR 161.2 billion.
The SDR is quite an unwieldy instrument for managing international liquidity. The normal procedure is for the Director General of the Fund to make a proposal for the allocation or cancellation of SDRs at least six months before the desired date. The Board of Directors (24 directors) must then approve the proposal. The General Assembly (187 countries today) must finally vote it and reach a majority of 85%."
[Mrt: also in this part there is a interesting info]
Box 3: A user’s guide to the SDR35
The SDR is not a currency. It is a claim on the member states of the IMF, who have a commitment to convert SDRs into key currencies under certain conditions. The mechanism is as follows: (1) the IMF agrees on an SDR allocation, (2) SDRs are allocated among member states according to their contributions to the Fund, (3) allocated SDRs generate interest payments (the SDR is an asset) and interest charges (the SDR is also a liability); the SDR department of the Fund serves as a clearing house; as the interest rate is the same on the asset as on the liability side, the operation is initially neutral, (4) a member state can have its SDRs converted by another member state, in which case it receives one of the currencies in the basket which it can then use to meet its commitments. Its SDR position becomes negative and it pays net interest to the SDR Department of the Fund, (5) the member state that was counterparty in the conversion has a positive SDR position, and receives the net interest. The counterparty for the conversion is determined either on a voluntary basis, or through a designation mechanism (IMF, 2001). The interest rate set by the Fund (based on the money market rates of the currencies in the basket) is low compared to the short-term rates emerging and developing countries are usually charged. This form of liquidity is therefore relatively inexpensive to use. In addition, the system has the advantage of pooling global liquidity, making large reserve accumulation unnecessary, at least in principle (SDR allocations do not depend on current account imbalances). However, the share of SDRs in foreign exchange reserves is still very low (in the range of 0.4%).
34 - In the same spirit, the Palais-Royal Initiative. (2011) suggests to activate the IMF “Council” envisaged in the Fund’s Articles of Agreement, an assembly of finance ministers and central bank governors that would take over the IMFC and the G20 ministers and governors for economic, monetary and financial issues. Here we suggest a smaller grouping of key central bankers for monetary cooperation. The two proposals are compatible.
35 - This box is based on Bénassy-Quéré and Pisani-Ferry (2010).
[Mrt: the document has a great list of references. Will be re-visited.]