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International Liquidity and the Role of the SDR in the International Monetary System

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  • J. J. Polak
  • Peter B. Clark
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    Abstract

    This paper describes how the changed conditions in the international monetary system have undermined the role originally envisaged for the SDR. It argues that the concept of a global stock of international liquidity, which was fundamental to the creation of the SDR, is now no longer relevant. Nonetheless, there are good reasons to satisfy part of the growing demand for international reserves with SDR allocations: (i) there are efficiency gains, as SDRs can be created at zero resource cost, and thus obviate the need for countries to run current account surpluses or engage in expensive borrowing to obtain reserves, and (ii) there would be a reduction in systemic risk, as SDRs would substitute to some extent for borrowed reserves, which are less reliable and predictable source of reserves, especially in times of crisis.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 02/217.

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    Length: 29
    Date of creation: 01 Dec 2002
    Date of revision:
    Handle: RePEc:imf:imfwpa:02/217

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    Related research

    Keywords: International monetary system; SDR role; international liquidity; sdr allocations; reserve assets; monetary fund; balance of payments; monetary system; reserve holdings; central banks; reserve currencies; current account; central bank; short-term debt; current account surplus; reserve currency; reserve asset; liquidity crisis; inflation; official reserves; monetary authorities; sovereign bonds; sdr charges; european monetary union; external payments; treasury securities; debt stocks; domestic currency; private creditors; foreign aid; sdr holdings; reserve accumulation; sdr interest rate basket; monetary reserves; monetary union; reserve positions; currency risk; private credit; current account surpluses; aggregate demand; international monetary arrangements; debtor countries; external resources;

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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2002. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," NBER Working Papers 8963, National Bureau of Economic Research, Inc.
    2. Jason Furman & Joseph E. Stiglitz, 1998. "Economic Crises: Evidence and Insights from East Asia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 1-136.
    3. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
    4. Dani Rodrik & Andres Velasco, 1999. "Short-Term Capital Flows," NBER Working Papers 7364, National Bureau of Economic Research, Inc.
    5. Catherine A. Pattillo & Andrew Berg & Gian-Maria Milesi-Ferretti & Eduardo Borensztein, 2000. "Anticipating Balance of Payments Crises," IMF Occasional Papers 186, International Monetary Fund.
    6. Bahmani-Oskooee, Mohsen & Malixi, Margaret, 1987. "Effects of exchange rate flexibility on the demand for international reserves," Economics Letters, Elsevier, vol. 23(1), pages 89-93.
    7. Robert P. Flood & Nancy P. Marion, 2002. "Holding International Reserves in an Era of High Capital Mobility," IMF Working Papers 02/62, International Monetary Fund.
    8. Williamson, John, 1973. "Surveys in Applied Economics: International Liquidity," Economic Journal, Royal Economic Society, vol. 83(331), pages 685-746, September.
    9. Lizondo, JoseSaul & Mathieson, Donald J., 1987. "The stability of the demand for international reserves," Journal of International Money and Finance, Elsevier, vol. 6(3), pages 251-282, September.
    10. J. Marcus Fleming, 1961. "International Liquidity: Ends and Means," IMF Staff Papers, Palgrave Macmillan, vol. 8(3), pages 439-463, December.
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    Cited by:
    1. Mendoza, Ronald U., 2004. "International reserve-holding in the developing world: self insurance in a crisis-prone era?," Emerging Markets Review, Elsevier, vol. 5(1), pages 61-82, March.
    2. Agnès Bénassy-Quéré & Damien Capelle, 2012. "On the inclusion of the Chinese renminbi in the SDR basket," Documents de travail du Centre d'Economie de la Sorbonne 12079, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    3. Anthony Clunies-Ross, 2004. "Alternative ways of paying for global public goods," Journal of International Development, John Wiley & Sons, Ltd., vol. 16(7), pages 971-982.
    4. Anthony Clunies-Ross,, 2006. "Ways of Paying for Global Public-Goods," Working Papers id:536, eSocialSciences.
    5. Clunies-Ross, Anthony & Langmore, John, 2006. "Political Economy of Additional Development Finance," Working Paper Series DP2006/09, World Institute for Development Economic Research (UNU-WIDER).

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