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Reforming the international monetary system in the 1970s and 2000s: would an SDR substitution account have worked?

  • Robert N McCauley
  • Catherine R Schenk

This paper analyses the discussion of a substitution account in the 1970s and how the account might have performed had it been agreed in 1980. The substitution account would have allowed central banks to diversify away from the dollar into the IMF’s Special Drawing Right (SDR), comprised of US dollar, Deutsche mark, French franc (later euro), Japanese yen and British pound, through transactions conducted off the market. The account’s dollar assets could fall short of the value of its SDR liabilities, and hedging would have defeated the purpose of preventing dollar sales. In the event, negotiators were unable to agree on how to distribute the open-ended cost of covering any shortfall if the dollar’s depreciation were to exceed the value of any cumulative interest rate premium on the dollar. As it turned out, the substitution account would have encountered solvency problems had the US dollar return been based on US Treasury bill yields, even if a substantial fraction of the IMF’s gold had been devoted to meet the shortfall at recent, high prices for gold. However, had the US dollar return been based on US Treasury bond yields, the substitution account would have been solvent even without any gold backing.

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Paper provided by Bank for International Settlements in its series BIS Working Papers with number 444.

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Length: 38 pages
Date of creation: Mar 2014
Date of revision:
Handle: RePEc:bis:biswps:444
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  1. Richard N. Cooper, 2009. "The Future of the Dollar," Policy Briefs PB09-21, Peterson Institute for International Economics.
  2. Menzie Chinn & Jeffrey Frankel, 2008. "Why the Euro Will Rival the Dollar," International Finance, Wiley Blackwell, vol. 11(1), pages 49-73, 05.
  3. Menzie D. Chinn & Guy Meredith, 2004. "Monetary Policy and Long-Horizon Uncovered Interest Parity," IMF Staff Papers, Palgrave Macmillan, vol. 51(3), pages 409-430, November.
  4. Ignazio Angeloni & Agnès Bénassy-Quéré & Benjamin Carton & Christophe Destais & Zsolt Darvas & Jean Pisani-Ferry & André Sapir & Shahin Vallée, . "Global currencies for tomorrow: a European perspective," Blueprints, Bruegel, number 592, June.
  5. Aliber, Robert Z, 1973. "The Interest Rate Parity Theorem: A Reinterpretation," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1451-59, Nov.-Dec..
  6. Schenk,Catherine R., 2010. "The Decline of Sterling," Cambridge Books, Cambridge University Press, number 9780521876971.
  7. Robert N McCauley & Patrick McGuire, 2009. "Dollar appreciation in 2008: safe haven, carry trades, dollar shortage and overhedging," BIS Quarterly Review, Bank for International Settlements, December.
  8. Robert N McCauley & Jean-François Rigaudy, 2011. "Managing foreign exchange reserves in the crisis and after," BIS Papers chapters, in: Bank for International Settlements (ed.), Portfolio and risk management for central banks and sovereign wealth funds, volume 58, pages 19-47 Bank for International Settlements.
  9. Hyun Song Shin, 2012. "Global Banking Glut and Loan Risk Premium," IMF Economic Review, Palgrave Macmillan, vol. 60(2), pages 155-192, July.
  10. Patrick McGuire & Goetz von Peter, 2009. "The US dollar shortage in global banking," BIS Quarterly Review, Bank for International Settlements, March.
  11. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
  12. Clifford R Dammers & Robert N McCauley, 2006. "Basket weaving: the euromarket experience with basket currency bonds," BIS Quarterly Review, Bank for International Settlements, March.
  13. Robert N McCauley & Kazuo Ueda, 2009. "Government debt management at low interest rates," BIS Quarterly Review, Bank for International Settlements, June.
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