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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

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.

Suggested Citation

  • J. J. Polak & Peter B. Clark, 2002. "International Liquidity and the Role of the SDR in the International Monetary System," IMF Working Papers 02/217, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:02/217
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    References listed on IDEAS

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    1. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 1-48.
    3. Williamson, John, 1973. "Surveys in Applied Economics: International Liquidity," Economic Journal, Royal Economic Society, vol. 83(331), pages 685-746, September.
    4. 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.
    5. Dani Rodrik & Andres Velasco, 1999. "Short-Term Capital Flows," NBER Working Papers 7364, National Bureau of Economic Research, Inc.
    6. J. Marcus Fleming, 1961. "International Liquidity: Ends and Means," IMF Staff Papers, Palgrave Macmillan, vol. 8(3), pages 439-463, December.
    7. 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.
    8. 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.
    9. 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.
    10. Catherine A Pattillo & Andrew Berg & Gian M Milesi-Ferretti & Eduardo Borensztein, 2000. "Anticipating Balance of Payments Crises--The Role of Early Warning Systems; The Role of Early Warning Systems," IMF Occasional Papers 186, International Monetary Fund.
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    Citations

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    Cited by:

    1. Clunies-Ross, Anthony & Langmore, John, 2006. "Political Economy of Additional Development Finance," WIDER Working Paper Series DP2006/09, World Institute for Development Economic Research (UNU-WIDER).
    2. Agnès Bénassy-Quéré & Damien Capelle, 2014. "On the inclusion of the Chinese renminbi in the SDR basket," International Economics, CEPII research center, issue 139, pages 133-151.
    3. Aryeetey, Ernest, 2004. "A Development-focused Allocation of the Special Drawing Rights," WIDER Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
    4. 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.
    5. Anthony Clunies-Ross,, 2006. "Ways of Paying for Global Public-Goods," Working Papers id:536, eSocialSciences.
    6. 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.

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