The "Hard" SDR - An Exploratory Analysis


WP/94/25-EA
The `Hard' SDR: An Exploratory Analysis by Subhash Thakur


There has been considerable interest in recent years in the possibility
of a hard SDR. This interest is motivated by the desire for an
international yardstick of monetary stability and inspired, in part, by the
proposals for a hard European Currency Unit. This paper explores the idea
of a hard SDR in the light of earlier discussions aimed at making it a
standard of constant purchasing power. It concludes that under the present
conditions of generalized floating of major currencies, the asymmetrical
basket technique is not a feasible option. Defining the SDR's value in
terms of a specific commodity basket, along the lines of the commodity
reserve currency proposals, is also ruled out as impractical and not likely
to achieve the objective of stable purchasing power for the SDR. The paper
then discusses a proposal to change the basket of the current SDR in line
with the inflation rates of the five component currencies so that the value
of the SDR is protected from erosion by inflation. The construction and
computation of such a hard SDR basket is illustrated on a monthly basis
for the period from July 1974 to July 1993. The hard SDR, thus defined,
could provide a unit of account of constant purchasing power which could be
useful in international trade and commerce. It could also provide an anchor
to which currencies could be pegged to maintain their purchasing power in
terms of a basket of goods and services of the five countries whose
currencies are included in the SDR. The adoption of the hard SDR to
denominate Fund quotas would insulate quotas from erosion by inflation. The
value of SDR allocations denominated in hard SDRs would be protected from
erosion by inflation.

The paper demonstrates that the construction of a hard SDR that would
preserve its purchasing power over goods and services is technically
feasible. The decision to adopt such a hard SDR for Fund operations would,
nevertheless, depend on a number of policy and operational considerations
that are outside the scope of the paper. One possibility would be to
compute and publish the hard SDR as a standard of constant purchasing
power and a unit of account for use in commercial contracts or other
purposes, without adopting it for Fund operations.