May 4, 2011 1

A Path to a New International Reserve Currency"

IV ASTANA ECONOMIC FORUM

Dr. Warren CoatsInternational Monetary Fund, retiredAstana, Kazakhstan

May 4, 2011 2

Overview of Presentation

• The need for an international reserve asset

• Key elements for expanding use of the SDR

• Transformation to a Real SDR– Replace currency valuation basket with large goods basket– Introduce indirect convertibility– Currency Board rules

May 4, 2011 3

Needed: Global Reserve Asset

Weaknesses of the dollar standard

• Triffin dilemma– Risk of default by reserve asset supplier

• Deterrence to globalization of exchange rate volatility

• Weak and asymmetric pressure to adjust cross boarder imbalances

May 4, 2011 4

Increasing the use of SDRs

• Benefits of the SDR– Not a claim on one country (global)– More stable exchange rate– Supply can be increased without BOP deficit– Can supplement or replace dollar

• Promoting use of the SDR– Continue large allocations– Encourage pricing and invoicing in SDRs– Encourage development of private SDRs– Develop clearing and settlement of private SDRs

May 4, 2011 5

Further measures to enhance use of SDRs

• Substitution account– Have plans ready to save dollar if dumped

• A constant real value SDR– Replace currency valuation basket with goods basket– Pay inflation adjusted interest rate

• Bancor – An SDR Currency– Not allocated but issued (sold)

May 4, 2011 6

A Real SDR Currency

• A Real SDR Currency Board– Indirect redeemability (bought and sold for t-bills)– Supply is determined by market demand– Arbitrage would keep value of SDR currency equal to

Real SDR valuation basket– Assets held against SDR liabilities (t-bills) generate

income to cover expenses and risk of valuation loses

• The new gold standard– Countries wishing to stabilize their own currency and

reduce exchange rate risk would peg to Real SDR.

May 4, 2011 7

Conclusion 1

• All elements of Real SDR currency board have been tested– Valuation basket without holding components (existing

SDR valuation basket)– Market demand controlling supply (existing national

currency boards)– Indirect convertibility (currency boards hold reserve

assets – t-bills – against currency issued)

May 4, 2011 8

Conclusion 2

• Benefits of Real SDR currency– Replace claims of the U.S. with claims on all members

of the IMF in countries’ FX reserves– Remove exchange rate risk from international trade (a

global currency for global trade)– A tendency for global SDR liquidity to become

countercyclical (because of procyclical behavior of commodity prices)