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

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  • Robert N McCauley
  • Catherine R Schenk

Abstract

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.

Suggested Citation

  • Robert N McCauley & Catherine R Schenk, 2014. "Reforming the international monetary system in the 1970s and 2000s: would an SDR substitution account have worked?," BIS Working Papers 444, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:444
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    References listed on IDEAS

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    1. 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.
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    3. Schenk,Catherine R., 2013. "The Decline of Sterling," Cambridge Books, Cambridge University Press, number 9781107612990, May.
    4. 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.
    5. Menzie Chinn & Jeffrey Frankel, 2008. "Why the Euro Will Rival the Dollar," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 55(3), pages 255-278, September.
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    9. Robert N McCauley & Kazuo Ueda, 2009. "Government debt management at low interest rates," BIS Quarterly Review, Bank for International Settlements, June.
    10. Richard N. Cooper, 2009. "The Future of the Dollar," Policy Briefs PB09-21, Peterson Institute for International Economics.
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    Cited by:

    1. McCauley, Robert, 2013. "Risk-On/Risk-Off, Capital Flows, Leverage and Safe Assets," Journal of Financial Perspectives, EY Global FS Institute, vol. 1(2), pages 145-154.

    More about this item

    Keywords

    Special Drawing Right; substitution account; reserve currency; foreign exchange reserves; International Monetary Fund;

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