## pp030618role-of-the-sdr ## Source details **Canonical URL:** [pp030618role-of-the-sdr](https://www.imf.org/-/media/files/publications/pp/2018/pp030618role-of-the-sdr.pdf) ## Other formats - [Markdown version](/-/media/files/publications/pp/2018/pp030618role-of-the-sdr.pdf.md) - [Structured JSON version](/-/media/files/publications/pp/2018/pp030618role-of-the-sdr.pdf.json) --- ### EXECUTIVE SUMMARY — Context and purpose - Paper objective: explore whether a broader role for the SDR could contribute to the smooth functioning and stability of the international monetary system (IMS). - Motivation: - Staff assessments: IMS resilient but with weaknesses in external adjustment mechanisms; limitations in official liquidity provisions through the Global Financial Safety Net (GFSN); and large-scale reserve accumulation with systemic side effects. - Expansion of the SDR valuation basket renewed interest in the SDR’s role. - SDR concepts evaluated: - O-SDR: the official SDR, the reserve asset administered by the IMF. - M-SDR: SDR-denominated financial instruments (“market SDRs”). - U-SDR: the SDR as a unit of account. - Emphasis: potential contributions to the IMS rather than operational design; the paper does not propose specific reform options. ### Key findings on the O-SDR - Current role: - The O-SDR currently plays a limited role in contributing to the smooth functioning of the IMS. - Potential scope and uses: - O-SDR allocations could buffer external adjustment and help reduce precautionary reserve accumulation. - O-SDRs could provide a flexible source of finance to bolster the Fund’s lending capacity (for example to respond to large-scale events). - Constraints and requirements: - The current Articles of Agreement (AoAs) would need revision to address challenges around scale, targeting and use of O-SDR allocations. - Creating O-SDRs outside the current allocation process or changing the allocation mechanism would require amendments to the AoAs. - Consistency with prior work: - Findings align with 2011 work concluding the O-SDR could aid the IMS but faces challenges. ### Key findings on M-SDR and U-SDR - Likely contributions and limitations: - Widespread M-SDR and U-SDR use would likely make more limited contributions to systemic stability and face significant implementation challenges. - Diversification properties could lower valuation changes for some balance sheets, potentially reducing risks of sharp external adjustment and precautionary reserve demand. - Systemic benefits of M-SDRs require deep, liquid markets, which may be difficult to generate. - Complementarities and supportive measures: - M-SDRs and U-SDRs could be mutually reinforcing. - Official support could create network externalities to attract transactions. - Factors limiting impact: - High correspondence between SDR basket weights and existing currency shares in international transactions may limit incremental diversification gains. - Many investors can customize currency exposures at low cost, reducing SDR attractiveness as a substitute. ### IMS weaknesses, drivers, and how SDR concepts might help - Identified IMS weaknesses: - Limitations in external adjustment mechanisms. - GFSN official liquidity provision shortcomings. - Large-scale reserve accumulation with systemic side effects. - How SDR concepts could mitigate weaknesses (schematic): - O-SDR: official reserve augmentation; potential conditional finance to the Fund; buffer to external adjustment; potential to reduce precautionary reserve accumulation (subject to AoA changes). - M-SDR and U-SDR: potential to lower valuation volatility for specific balance sheets via diversification, but require market depth and supporting official measures to be systemic. - Historical/recent developments informing the assessment: - Additional SDR allocations in 2009; inclusion of the Chinese renminbi in the SDR valuation basket effective October 1, 2016; issuance of SDR-denominated instruments in China in late 2016. - 2016 discussions on a general allocation or cancellation projected continued global demand growth for reserves but refrained from proposing an allocation pending further work. ### Future uncertainties and technological considerations - Structural evolution: - A more multipolar global economy could increase uncertainty over international currency usage and systemic risks around international liquidity and its provision. - Financial technology implications: - Further work needed on fintech impacts on the IMS and currency usage. - Distributed Ledger Technologies (DLTs) could boost interconnectedness and amplify susceptibility to spillovers and capital flow volatility; may influence reserve currency attractiveness. - Such an environment might call for re-evaluation of the SDR role. - Framing and limits: - An enhanced SDR role cannot substitute for sound policies and would not alone resolve all IMS weaknesses; it could help alongside global coordination, stronger surveillance, and an improved GFSN. --- ### Role and rationale of the O-SDR - Aim at creation: “to meet the long-term global need...to supplement existing reserve assets...” (AoA XVIII, Section 1; IMF, 1968). - Attractive features: - Value fixed in terms of gold while paying interest. - Usable without restriction to meet balance of payments (BOP) needs. - Not the liability of any single issuer; allocations expected to reduce overall demand for dollar-denominated claims and permit U.S. BOP adjustment without reserve losses elsewhere (Hirsch, 1971). ### Historical allocations and systemic role - First general allocation: SDR 9.3 billion allocated in 1970-72. - Second general allocation: SDR 12.1 billion in 1979-1981. - Largest allocation to date: SDR 161.2 billion made effective in August 2009 (equivalent to about US$250 billion, or about 3 percent of global reserves at the time). - Separate special allocation: SDR 21.5 billion in September 2009 to allow equitable participation after the Fourth Amendment to the AoAs. - Estimated impact of 2009 allocation on reserves: - Around 19 percent increase for low-income countries. - Over 7 percent increase for emerging markets (excluding China and fuel exporters). - Despite allocations, O-SDR holdings remained small relative to total reserves; SDR’s share in global reserves gradually diminished after 1981. - Current role limitations: - Only the official sector can hold SDRs. - Only three general allocations to date. - Global stock of SDRs has averaged just over 3 percent of global reserves since 1970. ### Use patterns from the 2009 allocation (Box 3) - Main use: supplement existing official reserves by holding SDRs or converting them into freely usable currencies through VTAs. - First-year sales (September 2009 to September 2010): SDR sales spiked briefly; 21 countries (mostly EMs and LICs) sold SDR 3.2 billion. - Longer period (September 2009 to June 2015), excluding program-related purchases: - 29 sellers. - Investment grade sellers sold on average about 20 percent of their 2009 allocations. - Non-investment grade sellers sold about 40 percent. - All 4 investment grade sellers were EMs. - The 25 non-investment grade sellers: 9 EMs and 16 LICs. - After the 14th General Review of Quotas (effective January 2016), around half of members chose to make part of quota subscription payments in SDRs rather than freely usable currencies. - Evidence on moral hazard: - Little evidence of widespread moral hazard from 2009 allocations. - Staff analysis finds modest short-term inflationary impact but no long-term effect on inflation. - Logit regression (Aug 2009–Dec 2010) finds fiscal deficits or deteriorating current account balances statistically significantly increased probability of selling SDRs. ### Could additional O-SDR allocations facilitate external adjustment? - Additional unconditional O-SDR allocations could indirectly facilitate adjustment by increasing liquidity buffers, depending on recipient responses: - If not fully offset by declines in reserve currency holdings and overall liquidity buffers increase, confidence could be boosted and capital outflows reduced, lowering adjustment needs. - O-SDRs can provide financing if large capital outflows materialize and create space to support needed adjustment measures. - Impacts depend on broader GFSN developments (e.g., growth of RFAs could affect need for O-SDRs; RFAs remain largely untested). --- ### IMS evolution, interconnectedness, and resulting weaknesses - Trade and financial integration (1990–2015): - Exports of Advanced Economies: increased from 18 to 30 percent of GDP. - Exports of EMDEs: increased from 12 to 26 percent of GDP. - Consequences of intensified interconnectedness: - Amplified effects of financial frictions on the IMS. - Larger spillovers and capital flow volatility exacerbating external adjustment weaknesses. - Limitations of official liquidity provision through the GFSN. - Large-scale reserve accumulation with systemic side effects. - Major currency role concentration: - Concentration in a few currencies (notably the U.S. dollar and the euro) creates outsized influence of issuer developments on other countries. - Global roles driven by economic size, depth/liquidity of financial markets, macro policy credibility, institutional strength, network externalities, habit formation. ### Spillovers, capital flow volatility, and episodic financial spillovers - Cross-border spillovers increasing; heightened interconnectedness raises spillovers via trade and financial channels. - Empirical patterns: - Increasing correlation between fluctuations in GDP and export growth. - Magnitude of capital flow swings has increased. - Asset prices more correlated across countries; financial integration transmits conditions even with flexible exchange rates. - In EMDEs, transmission from reserve currency issuers is larger and sensitive to financial integration. - Financial spillovers are often episodic and potentially non-linear; swings in risk aversion play a prominent role. ### Macroeconomic management tradeoffs and policy implications - Tradeoffs among currency stability, independent monetary policy, capital mobility, and financial stability complicate management. - Many countries anchor currencies while pursuing independent monetary policy, requiring tools like capital flow management and macroprudential measures. - Coordination challenges can generate unintended consequences for other countries. - Flexible exchange regimes with large cross-border liabilities face tradeoffs between financial stability and currency flexibility, increasing need for central bank foreign currency lending-of-last-resort. - Policy responses observed: - Central bank foreign currency swap arrangements among advanced economies during the GFC. - Post-GFC responses included SDR allocation as part of G20 crisis response (tripling IMF lending capacity and revamping lending facilities). --- ### Reserve accumulation: scale, motives, and systemic side effects - Motives and patterns: - Reserve holdings, mostly liabilities of residents of main international currency issuers, remain primary liquidity buffers and have increased since late 1990s across most EMDEs and some AEs. - Precautionary motives empirically associated with size of cross-border liabilities, past crises, and exchange rate regimes. - Private demand for reserve assets can add to official demand when safety of other assets is questioned. - Systemic resilience benefits: - Reserves smooth disruptive external adjustment and enable foreign currency domestic lending of last resort to preserve financial stability. - Sufficient reserves can strengthen confidence and reduce probability of self-fulfilling crises. - Negative systemic side effects of excessive accumulation: - Larger external imbalances: reserve-related liabilities generate larger current account deficits for reserve currency issuers; IMF’s EBA model finds association between a currency’s share in international reserves and issuer’s current account deficit. - External balance sheet risks: reserve-related inflows and subsequent outflows into riskier investments increase exposure to external shocks and currency mismatch risks. - Inefficiency in consumption and investment: reserve-related flows can divert capital from high- to low-productivity investments. - Interest rate effects: reduction in foreign holdings of U.S. Treasuries by $100 billion would increase yields by 1.5-1.8 basis points; rule of thumb: each 1 percent change in foreign exchange reserves (composition constant) changes Treasury yields by 1 basis point in opposite direction. --- ### Complementarities across SDR concepts (M-SDR, U-SDR, O-SDR) - An ecosystem may be required to generate network externalities and attract transactions; national currencies play international roles across means of payment, unit of account, and store of value supported by depth, liquidity, network effects. - Potential complementarities: - U-SDR-denominated transactions could be financed/hedged using M-SDRs, increasing M-SDR liquidity and reducing transaction costs. - Greater M-SDR use might encourage U-SDR pricing. - Secure payments in a stable unit of account would spur wider M-SDR and U-SDR use. - Limits: - Achieving necessary depth and liquidity is the key challenge. ### Market scale, liquidity, and infrastructure requirements for M-SDRs - Critical elements for self-perpetuating M-SDR uptake: - Stable/substantial base of issuers and investors to lower costs and remove illiquidity premium. - Benchmark yield curve, particularly at short-end, via regular issuance of high-quality instruments. - Preliminary staff analysis suggests a market size of $100 billion could sustain a liquid debt securities market and derivatives market. - ETFs replicating the SDR by holding constituent currencies could promote SDR bond market by holding M-SDR instruments. - Infrastructure and operational challenges: - Need continual pricing of the O-SDR against main global currencies and more frequent O-SDR interest rate resets (currently weekly) to facilitate pricing M-SDRs and marking to market. - SDR basket composition/weights are periodically revised by the IMF’s Executive Board; large unexpected revisions could significantly impact SDR valuation, though most changes have been small and risk can be modeled. - Widespread M-SDR use likely requires development of M-SDR accounts for settlement directly in SDRs; absent that, settlement in a currency creates extra steps and exposures. - Settlement across jurisdictions may pose currency risks due to limited convertibility. ### Official sector support to promote M-SDR activity - Official initiatives could offset transaction costs and develop market infrastructure but uptake may remain hard to achieve: - Regular M-SDR bond issuance by MDBs or sovereigns to establish benchmarks and enable index inclusion; initial additional costs to official operations. - IMF M-SDR bond issuance to develop market and provide IMF lending resources; large issuance to form a benchmark yield curve in normal times would likely require AoA amendments and alter IMF financing model. - Liquidity backstop facilities: central banks could provide repo facilities accepting M-SDR assets for short-term liquidity in convertible currencies; providing O-SDRs rather than convertible currencies would require AoA amendments to permit private sector O-SDR holdings. - Clarifying regulatory issues and promoting market infrastructure (e.g., Basel III liquidity coverage ratio treatment) to encourage M-SDR adoption. ### U-SDR impediments and statistics considerations - Clearance/payments system needed to settle SDR claims cost-effectively and avoid final settlement in currencies and associated currency risk. - Uncertainty from SDR reviews could affect attractiveness as unit of account; basket revisions’ long-term impacts generally modest. - Demand for SDR-denominated statistics limited; publishing SDR-denominated statistics could smooth but not fully remove valuation changes from currency fluctuations. - National data compilers report limited demand; network effects and switching costs hinder broad U-SDR take-up. --- ### The SDR in the future IMS: multipolarity, transition risks, and possible roles - Economic and technological developments create uncertainty about IMS shape and could affect SDR merits. - Uncertain transitions: - Demand for reserves might outpace liquid liabilities growth of a shrinking group of AE issuers. - EMDEs' need for additional FX reserves may decline as markets develop and exchange rate flexibility increases. - Supply-side uncertainty on emergence/location of alternative “safe assets.” - Network effects and habit formation could slow multipolarity impacts; new evidence suggests network effects may be weaker and declining due to technology. - Transition risks: - Risk of insufficient liquidity or deterioration in “safe asset” quality. - If inertia is limited, rapid/volatile shifts in reserve currency composition could occur; if strong, Triffin-dilemma concerns could intensify. - Portfolio shifts to new issuers, once inertia overcome, could be substantial and disruptive. - Potential roles for SDR constructs in transition: - O-SDR: could lower precautionary reserve accumulation and reduce pressure on reserve issuers’ BOPs in a multipolar world. - M-SDR: could enhance stability by facilitating shifts to holdings in multiple currencies with reduced volatility in demand for any particular currency. - U-SDR: could provide a more stable common standard for transactions if currency fluctuations become more pronounced. - Substitution account concept: - IMF-administered account holding FX in return for SDR-denominated claims to diversify currency composition off-market and avoid disrupting FX markets. - Tradable claims could support M-SDR activity, but account bears significant FX and credit risks; past discussions stalled over cost allocation. ### Radical redesign and limits of SDR expansion - Radical redesign could envisage SDR as an “outside” money or global currency with issuance rules (e.g., issued in episodes of stress or as a global risk-free asset). - Practical/economic limits: - Backing constraints could bind SDR issuance quantity. - Extending uses/users requires AoA changes; widespread use may not be desirable. - Backing exposes fiscal authorities to exchange rate and interest rate risks, affecting public debt sustainability. - SDR-ization could reduce monetary policy autonomy and render exchange rate adjustment less effective unless the world moves closer to an optimal currency area. - An SDR policy rule could be oriented to global rather than individual country cyclical positions. --- ### Technological innovation, fintech, DLTs, and implications for the SDR - DLTs can lower back-office/compliance costs and potentially boost cross-border flows, but currently require fiat-to-token conversion for payments. - Cryptocurrencies and CBCCs: - Private cryptocurrencies limited by high price volatility, small acceptance networks, and little evidence of unit-of-account use independent of fiat. - Central bank cryptocurrencies (CBCCs) might be more trusted and address shortcomings of private cryptocurrencies. - Possible effects of technology: - Could overcome inertial forces supporting incumbent currencies and speed transitions between reserve assets. - If scale economies decline, IMS could accommodate more reserve currencies, shifting toward currencies with superior payment platforms. - Could boost interconnectedness, aggravating spillovers and capital flow swings. - Institutional applications: - Smart contracts, DLT-based trade finance, and hub-and-spoke DLT payment networks could improve trade and reduce intermediaries. - Central banks experimenting with wholesale CBDC pilots (examples cited). - Risks from private cryptocurrencies and DLTs: - Could erode monetary base, pose unknown risks in stress, facilitate circumvention of controls, and enable illicit finance. - Risks modest unless DLTs/cryptocurrencies become widespread. - Implications for SDR adoption: - Technology could help overcome market development barriers but current constraints are political and economic rather than technological. - Open questions include whether alternative payment/settlement systems could support M-SDRs, benefits of an O-SDR as a digital token, and interactions between CBCCs and a digital SDR. - Market participants may seek private cryptocurrencies linked to the SDR; IMF has not trademarked the SDR and does not comment on such initiatives. --- ### Market, policy, and discussion questions posed to Directors - Is there a meaningful role for the O-SDR in addressing IMS and GFSN gaps? What avenues for expanding the O-SDR role are most promising? How to assess moral hazard concerns and targeting allocations to liquidity-constrained countries? - Is there a role for the M-SDR in aiding external adjustment and reducing excess reserve accumulation? Can technical and institutional challenges be overcome with official support? - Is there a supporting role for the U-SDR? - Is broader work warranted on how economic and technological developments can shape the IMS, including the SDR’s role? *Source: EXECUTIVE SUMMARY — CONSIDERATIONS ON THE ROLE OF THE SDR (March 6, 2018).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context and purpose - This paper explores whether a broader role for the SDR could contribute to the smooth functioning and stability of the international monetary system (IMS). - Motivation for renewed assessment: - Recent staff assessments highlighted IMS resilience but also identified weaknesses in external adjustment mechanisms; limitations of official liquidity provisions through the Global Financial Safety Net (GFSN); and large-scale reserve accumulation—with systemic side effects. - The expansion of the SDR valuation basket renewed interest in the SDR’s role. - The paper examines three concepts of the SDR: - The official SDR, the reserve asset administered by the IMF (O-SDR). - SDR-denominated financial instruments, or “market SDRs” (M-SDR). - The SDR as a unit of account (U-SDR). - The paper does not propose specific reform options; emphasis is on potential contributions to the IMS rather than operational design. ### Key findings on the O-SDR - Current role: - The O-SDR currently plays a limited role in contributing to the smooth functioning of the IMS. - Potential scope: - O-SDR allocations could buffer external adjustment and help reduce precautionary reserve accumulation. - O-SDRs could provide a flexible source of finance to bolster the Fund’s lending capacity, for example to respond to large-scale events. - Constraints and requirements for expanded use: - The current Articles of Agreement (AoAs) would need to be revised to address important challenges around scale, targeting and use of O-SDR allocations. - Changes to the allocation mechanism and options to create O-SDRs outside of the current allocation process to help address gaps in the Fund’s lending capacity would again require amendments to the AoAs. - Consistency with prior work: - Findings are in line with work conducted in 2011, which concluded that the O-SDR could potentially have a more promising role in aiding the IMS but faces challenges. ### Key findings on M-SDR and U-SDR - Likely contributions and limitations: - Widespread M-SDR and U-SDR use would likely make more limited contributions to systemic stability and face significant implementation challenges. - Diversification properties of the M-SDR and U-SDR could lower valuation changes for the balance sheets of some borrowers and investors, which may reduce the risks of sharp external adjustment and potentially reduce precautionary reserve demand. - Systemic benefits of the M-SDR would only come with deep, liquid markets, which may be difficult to generate. - Complementarities and supportive measures: - Use of M-SDRs and U-SDRs could be mutually reinforcing, exploiting potential complementarities. - A supportive environment based on official support could help generate network externalities, attracting a sizeable share of transactions. - Factors limiting impact: - High correspondence between SDR basket weights and the existing share of currencies in international transactions could limit incremental diversification gains. - Many investors can customize their currency exposures at low cost, reducing the attractiveness of the SDR as a substitute. ### IMS weaknesses, drivers, and how the SDR might help - Identified IMS weaknesses: - Limitations in external adjustment mechanisms. - GFSN official liquidity provision shortcomings. - Large-scale reserve accumulation with systemic side effects. - How SDR concepts could mitigate weaknesses (schematic summary): - O-SDR: direct official reserve augmentation, potential conditional finance to the Fund, buffer to external adjustment, potential to reduce precautionary reserve accumulation (subject to AoA changes). - M-SDR and U-SDR: potential to lower valuation volatility for specific balance sheets via diversification, but require market depth and supporting official measures to be systemic. - Historical and recent developments informing the assessment: - Renewed interest follows the additional SDR allocations in 2009, inclusion of the Chinese renminbi in the SDR valuation basket (effective October 1, 2016), and issuance of SDR-denominated financial instruments in China in late 2016. - Previous discussions in 2016 on a general allocation or cancellation of SDRs projected that global demand for reserves would continue to increase but refrained from proposing an allocation pending further work. ### Future uncertainties and technological considerations - Structural evolution of the IMS: - The prospect of a more multipolar global economy could exacerbate uncertainties over how international currency usage will evolve and increase systemic risks around international liquidity and its provision. - Financial technology implications: - Further work is needed on how fintech could impact the IMS and currency usage. - Distributed Ledger Technologies (DLTs) could boost interconnectedness and amplify susceptibility to spillovers and capital flow volatility while influencing the attractiveness of a reserve currency. - Such an environment might call for a re-evaluation of the role of the SDR. ### Framing and scope - Emphasis: - The emphasis is on the SDR’s potential to aid the IMS rather than on specific reforms. - Limits of an enhanced SDR role: - An enhanced role for the SDR cannot substitute for sound policies nor on its own resolve all IMS weaknesses, but may help alongside other efforts, including global coordination, stronger surveillance, and an improved GFSN. - Paper structure (high level): - Reviews role of SDR and IMS weaknesses; evaluates whether SDR concepts could address weaknesses; considers complementarities across SDR forms; discusses multipolarity and fintech impacts; suggests issues for discussion. *Source: EXECUTIVE SUMMARY — CONSIDERATIONS ON THE ROLE OF THE SDR (March 6, 2018).* ### 9. The O-SDR was expected to lower systemic vulnerabilities by increasing reserves while ### 9. The O-SDR was expected to lower systemic vulnerabilities by increasing reserves while ### Role and rationale of the O-SDR - The aim in creating the O-SDR: “to meet the long-term global need...to supplement existing reserve assets...” (AoA XVIII, Section 1; IMF, 1968). - Features making the O-SDR attractive as a reserve asset: - Value fixed in terms of gold while paying interest. - Ability to use it without restriction to meet balance of payments (BOP) needs. - Not the liability of any single issuer, so allocations were expected to reduce overall demand for dollar-denominated claims and permit U.S. BOP adjustment without reserve losses in other countries (Hirsch, 1971). ### Historical allocations and systemic role - First general O-SDR allocation: - SDR 9.3 billion allocated in 1970-72 (Garritsen de Vries, 1976). - Occurred amid collapse of the Bretton Woods par value system and the end of convertibility of official U.S. dollar holdings into gold in 1971. - Second general allocation: - SDR 12.1 billion in 1979-1981 following reforms including valuation according to a basket of currencies. - Largest allocation to date: - SDR 161.2 billion made effective in August 2009 (equivalent to about US$250 billion, or about 3 percent of global reserves at the time). - A separate special allocation: SDR 21.5 billion in September 2009 to allow equitable participation after the Fourth Amendment to the AoAs. - Estimated impact on reserves from the 2009 allocation: - Around 19 percent increase for low-income countries. - Over 7 percent increase for emerging markets (excluding China and fuel exporters). - Despite these allocations, overall O-SDR holdings remained small relative to total reserves and the SDR’s share in global reserves gradually diminished after 1981. ### Interest in U-SDR and M-SDR uses - U-SDR: - Adopted as a unit of account by several international organizations. - Used as an exchange rate anchor by about 15 countries historically; use has fallen to three countries (IMF, 2016f). - Occasional use in international commercial transactions (example: transit fees for the Suez Canal). - M-SDR: - SDR-denominated instruments issued by private and public entities have included commercial bank deposits, syndicated credits, certificates of deposit, Eurobonds, and floating-rate instruments; demand deposit accounts offered transactions directly in SDR (Hoguet and Tadesse, 2011). - Renewed interest only more recently following M-SDR bond issuances in China. - Subsequent U.S. dollar strength and development of alternative diversification options suppressed broader interest in U-SDR and M-SDR markets. ### IMS evolution, interconnectedness, and resulting weaknesses - Since 1990 through 2015: - Exports of Advanced Economies increased from 18 to 30 percent of GDP. - Exports of Emerging Market and Developing Economies (EMDEs) rose from 12 to 26 percent of GDP. - Financial integration increased dramatically in cross-border positions and number of large connections (Figure 4). - Consequences of intensified interconnectedness: - Amplified effects of financial frictions on the IMF’s International Monetary System (IMS). - Large spillovers and volatility in capital flows exacerbating weaknesses in external adjustment. - Limitations of official liquidity provision through the GFSN. - Large-scale reserve accumulation with systemic side effects. - Major international currency roles: - Concentration in a few currencies (notably the U.S. dollar and the euro) creates outsized influence of economic developments in those issuers on other countries. - Global roles driven by fundamentals: economic size, depth and liquidity of financial markets, macroeconomic policy credibility, institutional strength, network externalities, and habit formation. ### Spillovers, capital flow volatility, and episodic financial spillovers - Cross-border spillovers have been increasing; higher interconnectedness raises spillovers through trade and financial channels (Box 2). - Empirical patterns and concerns: - Increasing correlation between fluctuations in GDP and export growth rates (Figure 6). - Magnitude of capital flow swings has increased (Figure 7). - Asset prices have become more correlated across countries; financial integration transmits financial conditions across borders even under flexible exchange rates. - In EMDEs, transmission from reserve currency issuers is larger and especially sensitive to degree of financial integration. - Financial spillovers tend to be episodic and potentially non-linear, with swings in risk aversion playing a prominent role. ### Macroeconomic management tradeoffs and policy implications - Tradeoffs among currency stability, independent monetary policy, capital mobility, and financial stability complicate macroeconomic management. - Many countries still anchor their currencies while pursuing independent monetary policy, requiring augmented toolkits (capital flow management and macroprudential measures). - Coordination challenges: - Interactions among instruments can add complexity and generate unintended consequences for other countries. - Flexible exchange rate regimes with large cross-border liabilities face tradeoffs between financial stability and currency flexibility, increasing the need for central bank foreign currency lending-of-last-resort operations during episodes of market stress. - Policy responses observed: - Creation of central bank foreign currency swap arrangements among advanced economies during the GFC. - Post-GFC policy responses included the SDR allocation as part of a broader G20 crisis response (tripling IMF lending capacity and revamping IMF lending facilities). *International Monetary Fund — Considerations on the Role of the SDR (excerpts from the provided content)* ### 20. Increased interconnectedness helped expose weaknesses of the IMS. Of these, there are ### Increased interconnectedness helped expose weaknesses of the IMS ### Major identified weaknesses - Three weaknesses that the SDR might help address: - Weak external adjustment mechanisms. - Limitations of official liquidity provision through the GFSN. - Large-scale reserve accumulation with systemic side effects. ### External adjustment: empirical patterns and drivers - Despite a system of flexible exchange rates, external adjustment has been challenging: - After the GFC, real exchange rate adjustments played a limited role in reducing current account imbalances because imbalances and subsequent exchange rate movements were only loosely related; currency movements generated weak trade volume and growth responses (IMF, 2014). - Capital flow volatility has at times produced sharp and sudden exchange rate adjustments that have tended to be contractionary since the effects of a depreciation on domestic demand have exceeded any expansionary trade effects (IMF, 2016a). - Such episodes often (but not always) occur amid large current account deficits, underscoring an asymmetric adjustment problem. - Changes in the structure of trade: - Trade pricing in a small number of dominant currencies can inhibit external adjustment due to an asymmetric short-run response of trade flows to exchange rate movements (Gopinath, 2015; Casas and others, 2016). - With dominant currency pricing, a depreciation against the dominant currency may reduce real imports but has no impact on real exports, resulting in more muted external adjustment. - The rising share in global trade of EMDEs, which use the dollar more widely in pricing, can exacerbate this effect. - The build-up of global value chains may weaken the relationship between real exchange rate adjustment and trade flows. ### Official international liquidity provision (GFSN) — limitations - The official GFSN includes bilateral swap lines, regional financing arrangements, and IMF resources and has been expanded since the GFC. - However, important limitations remain: - Access is unpredictable. - Coverage is uneven. - Coordination among layers is underdeveloped and often untested. - Political costs for many borrowers in accessing some elements are high (IMF, 2016b; 2016c; 2016h). ### Reserve accumulation: scale, motives, and systemic side effects - Self-insurance through reserve accumulation has been a central policy response: - Reserve holdings—mostly liabilities (mainly sovereign securities) of residents of the main international currency issuers—remain the primary liquidity buffer for most countries and have increased substantially since the late 1990s across most EMDEs and a few AEs. - Empirical analysis confirms precautionary motives: accumulations have been associated with the size of cross-border liabilities, past occurrence of crises, and exchange rate regimes (Obstfeld and others, 2010; Obstfeld, 2013; Ghosh and others, 2014). - Wider private demand for reserve assets can add to official sector demand, particularly when the safety of other assets is questioned (Caballero and Farhi, 2014). - Reserve holdings can enhance systemic resilience: - Reserves can smooth disruptive external adjustment and allow central banks to conduct domestic lending of last resort operations in foreign currency to preserve financial stability. - Sufficient reserves, even if not actively used, can strengthen confidence and reduce the probability of self-fulfilling crises, contributing to enhanced systemic stability (Llaudes and others, 2010; IMF, 2011d; Gourinchas and Obstfeld, 2012). - Excessively large reserve accumulation can have negative systemic side effects: - Larger external imbalances: reserve-related liabilities generate larger current account deficits for reserve currency issuers and reserve accumulation raises the current account of the accumulating country; IMF’s EBA model finds an association between a currency’s share in international reserves and a currency issuer’s current account deficit. - External balance sheet risks: reserve-related inflows and subsequent outflows into riskier investments raise reserve currency issuers’ external balance sheets and exposure to external shocks; reserve-related flows easing financial conditions in reserve currency issuers can increase borrowing in those currencies and currency mismatch risks. - Inefficiency in consumption and investment: reserve-related flows can divert capital from high-productivity to low-productivity investments and help explain capital flows from faster-growing to slower-growing economies. - Interest rates: foreign official holdings have a sizable impact on the U.S. Treasury yield curve; a reduction in foreign holdings of U.S. Treasuries by $100 billion would increase yields by 1.5-1.8 basis points (Csonto and Tovar, 2017). - A rule of thumb: each 1 percent change in foreign exchange reserves (keeping the composition constant) changes Treasury yields by 1 basis point in the opposite direction. ### Current role and limitations of the O-SDR - The O-SDR currently plays a limited role: - Only the official sector can hold SDRs. - There have been only three general allocations. - The global stock of SDRs has averaged just over 3 percent of global reserves since 1970. - Lack of consensus around additional O-SDR allocations stems in part from moral hazard concerns: - No conditions on O-SDR use and the reconstitution requirement in abrogation mean O-SDRs could be used to defer warranted macroeconomic adjustment. - For the 2009 allocation, staff analysis (IMF, 2016e) and anecdotal evidence show some delayed rather than smoothed adjustment, but not widespread misuse. - Reinstating the reconstitution requirement could reduce moral hazard but would significantly reduce the attractiveness of the O-SDR as a reserve asset. - Large additional allocations could magnify reluctance to enact needed adjustment policies and would require enhanced cooperation to finance higher volumes of O-SDR exchange by raising contingent claims on existing foreign exchange reserves, causing potential unease among suppliers of such currencies. - Current mechanisms supporting O-SDR exchange: - Voluntary trading arrangements (VTAs) with participants in the SDR Department. - The SDR designation mechanism under which sufficiently strong participants must, when designated, provide freely usable currencies in exchange for O-SDRs up to specified amounts (AoA XIX). ### Could additional O-SDR allocations facilitate external adjustment? - Additional unconditional O-SDR allocations could indirectly facilitate adjustment by increasing liquidity buffers, depending on recipient responses: - If O-SDRs are not fully offset by declines in reserve currency holdings and overall liquidity buffers increase, confidence could be boosted and capital outflows reduced, lowering adjustment needs. - O-SDRs can provide financing if large capital outflows materialize and create space to support implementation of needed adjustment measures. - The impact of additional O-SDR allocations may be affected by broader developments within the GFSN (for example, growth of RFAs could reduce the need for own reserves or O-SDRs, though RFAs remain largely untested). *Source: pp030618role-of-the-sdr (excerpt).* ### Box 3. How Did Countries Use Their 2009 SDR Allocation? ### Box 3. How Did Countries Use Their 2009 SDR Allocation? ### Uses of SDRs - Main use: supplementing existing official reserves, either by holding SDRs or converting them into freely usable currencies through VTAs, thereby changing the composition of reserves. - Indirect uses after conversion to freely usable currencies: pay for imports, meet external debt obligations, intervene in foreign exchange markets. - Direct uses: make quota payments, repurchases, pay charges and fees to the Fund, provide resources for the Poverty Reduction and Growth Trust. ### What happened after the 2009 allocation? - In the first year following the allocations (September 2009 to September 2010), SDR sales spiked briefly. - A total of 21 countries, mostly emerging markets (EMs) and low-income countries (LICs), sold some SDRs amounting to SDR 3.2 billion. - Some 90 percent of these members sold at least 75 percent of their 2009 allocations (excluding sales associated with program-related purchases). - Over the longer period September 2009 to June 2015, excluding sales associated with program-related purchases from the Fund: - There were 29 sellers. - Sellers with an investment grade rating sold on average about 20 percent of their individual 2009 allocations. - Sellers with a non-investment grade rating sold about 40 percent. - All 4 investment grade sellers were EMs. - The 25 non-investment grade sellers consisted of 9 EMs and 16 LICs. - After the 14th General Review of Quotas became effective in January 2016, around half of the members chose to make part of their quota subscription payments in SDRs rather than in freely usable currencies, possibly using their 2009 SDR allocations. - A few borrowing members repaid their IMF loans using the 2009 SDR allocations. ### Evidence on moral hazard and empirical findings - Overall assessment: little evidence of widespread moral hazard from the 2009 allocations. - Context: allocations were made at the height of the GFC to bolster reserves and help the membership navigate the crisis. - Potential adverse channel: if allocations financed overly-expansionary and/or unsustainable policies or delayed needed adjustment, they could result in higher short-run inflation. - Empirical analyses cited: - Building on Chitu (2016), staff analysis using a difference-in-difference regression finds some modest evidence that the 2009 allocations may have had a short-term inflationary impact, but no long-term effect on inflation. - A logit regression analysis over August 2009-December 2010 (the peak SDR sales period) finds that countries with fiscal deficits or deteriorating current account balances had a statistically significant higher probability of selling SDRs. - A survey of staff reports over 2009-10 reveals anecdotal evidence of uses by some members of the allocation, including budget financing, that could be seen as delaying the recommended policy adjustment. *International Monetary Fund — Box 3, "How Did Countries Use Their 2009 SDR Allocation?"* ### 1.0 percent of GDP (Figure 17). The current account ### pp030618role-of-the-sdr - 1.0 percent of GDP (Figure 17). The current account ### Impact on global safe assets and seigniorage - Greater use of the SDR could lead to a broader distribution of seigniorage benefits. - Any impact on the global supply of safe assets would likely be small. - Greater net availability of safe reserve assets, including SDR-denominated assets, would require borrowers of a high credit quality to shift issuance from non-reserve currencies to M-SDRs without undermining the quality of their assets due to the added exchange rate risk. - The incentive for such a shift seems limited, and the volumes of such issues are modest. - Hence, the overall impact of M-SDRs on the global supply of safe assets would likely be small. ### Complementarities across SDR concepts (M-SDR, U-SDR, O-SDR) - An ecosystem may be required to generate network externalities and attract a large share of transactions. - National currencies that play international roles do so across a wide spectrum of activity—as means of payment, unit of account, and store of value—supported by their depth, liquidity and network externalities. - Achieving these conditions is a key challenge for the M-SDR and U-SDR to reduce the costs of uptake relative to their potential benefits. - There are potential complementarities between M-SDR and U-SDR and scope for the O-SDR and official support to provide a more supportive environment which could help reduce overall costs. - M-SDRs and U-SDRs could be mutually re-enforcing. - Increased prevalence of U-SDR-denominated transactions could be financed or hedged using M-SDRs, increasing M-SDR liquidity and reducing transactions costs. - Greater M-SDR use might encourage agents to price transactions in U-SDRs. - The ability to make secure payments in a stable unit of account would likely spur wider use of the M-SDR and U-SDR. ### Market scale, liquidity, and infrastructure requirements - Market scale and liquidity would be critical for a self-perpetuating uptake of the M-SDR. - A stable and substantial base of issuers and investors will likely be required to bring down the costs of using M-SDR instruments and to eliminate any illiquidity premium. - Market participants emphasized the importance of a benchmark yield curve—particularly at the short-end—for pricing instruments through regular issuance of high-quality instruments. - Cross-country data show a negative relationship between amount of outstanding debt and bid-ask spreads; preliminary staff analysis suggests a market size of $100 billion could sustain a liquid debt securities market and accompanying derivatives market. - Exchange Traded Funds (ETFs) are popular and conducive to replicating the SDR by holding its constituent currencies; depending on investor demand, they could subsequently promote the SDR bond market by holding M-SDR instruments. - The M-SDR would need to overcome market infrastructure, settlement, and revision risk challenges. - Providing continual pricing of the O-SDR against main global currencies and increasing the frequency of O-SDR interest rate resets (currently weekly) would facilitate pricing M-SDRs and marking holdings to market. - The composition and weighting of the SDR basket are subject to periodic revisions by the IMF’s Executive Board; large, unexpected revisions could have a significant impact on the SDR’s valuation and properties, though most changes to the basket have been small and the risk can be modeled. - Widespread use of M-SDRs would likely require development of M-SDR accounts such that transactions are settled directly in SDRs; until then, M-SDRs would need to be settled in a currency, creating an additional step and exposure to those currencies. - Settlement in different jurisdictions may pose currency risks due to limited convertibility of some currencies. ### Official sector support to promote M-SDR activity (Box 4) - Official sector support could offset transaction costs and develop market infrastructure, though uptake may still be hard to achieve. - Potential official initiatives to overcome threshold effects: - A regular program of M-SDR bond issuance by multilateral development banks (MDBs) or sovereigns to establish benchmarks for pricing SDR-denominated securities and enable inclusion in bond market indices; such issuance would impose additional costs on official operations at least initially. - M-SDR bond issuance by the IMF to help develop the market and provide resources for IMF lending; issuance in large enough amounts to form a benchmark yield curve during normal times would likely require amending the AoAs and fundamentally alter the financing model of the IMF, raising major policy and regulatory issues. - Providing liquidity backstop facilities for the market: central banks could provide repo facilities for investors to pledge M-SDR assets in exchange for short-term liquidity in convertible currencies (provided instruments meet credit risk requirements); O-SDRs, rather than convertible currencies, could be provided by central banks, although that would require amending the AoAs to permit the private sector to hold O-SDRs. - Clarifying regulatory issues and promoting development of other market infrastructure elements (e.g., regulatory treatment affecting whether M-SDR instruments qualify as high-quality liquid assets under the Basel III liquidity coverage ratio). ### U-SDR impediments and data/statistics considerations - The U-SDR would also face impediments. - A clearance/payments system would be needed to settle SDR claims cost-effectively, avoiding final settlement in currencies and the associated currency risk. - Uncertainty on the outcome of SDR reviews could affect the SDR’s attractiveness as a unit of account, though the impact of basket revisions on the SDR’s longer-term value has generally been modest. - Demand for SDR-denominated statistics is currently limited; publishing statistics denominated in SDRs could smooth (but not fully remove) valuation changes from fluctuations among major currencies. - Surveys indicate national data compilers generally did not see significant demand for SDR-denominated statistics, and the appetite of data users was limited, highlighting network effects and switching costs for broad take-up of the U-SDR. ### The SDR in the future IMS: multipolarity, transition risks, and possible roles - Economic and technological developments create uncertainties about the future shape of the IMS and might increase or decrease the merits of the SDR. - The global economy is becoming more multipolar, with potential shifts in demand for and supply of reserve assets, but the timing of such shifts is hard to predict. - Uncertain economic transitions and currency-use outcomes: - Growth in demand for reserves might outpace growth in liquid liabilities of a small number of AE issuers who represent a shrinking portion of the global economy. - EMDEs may not require additional foreign exchange reserves as they grow, as their financial markets develop and exchange rate flexibility increases. - On the supply side, it is unclear when alternative sources of “safe assets” will emerge, or where; financial market development, institutional reforms, and geopolitical factors matter. - Network effects and inertia due to habit formation could slow down the impact of multipolarity trends, though new evidence suggests network effects may be weaker and declining due to technological advances. - Transition risks to the IMS may be significant: - Uncertainties about supply and demand evolution highlight systemic risk of insufficient liquidity or deterioration in the quality of “safe assets.” - If inertial forces are limited, rapid and volatile changes in currency composition of reserve assets could occur; if strong, Triffin-dilemma concerns could become acute and risk disorderly shifts. - Once inertia is overcome, portfolio shifts to new issuers could be substantial and cause disruptive exchange rate and capital flow movements. - In times of global stress, uncertainty could arise over whether there will be one preferred source of global liquidity, multiple cooperating lenders of last resort, or insufficient liquidity in a fragmented system. - No consensus on stability of multipolar versus unipolar reserve systems: - Multiple reserve issuers could facilitate supply, incentivize policy discipline, and require greater international coordination, but outcomes depend on IMS characteristics (relative issuer sizes, scarcity of reserve assets, exchange rate systems, commitment to low inflation, etc.). - With more reserve issuers, the system could be exposed to more frequent and pronounced portfolio shifts. - An SDR-denominated substitution account could support transition but faces serious obstacles: - The substitution account would place foreign exchange holdings in an IMF-administered account in return for SDR-denominated claims, holding long-term claims on reserve currency issuers to diversify currency composition off-market and avoid disrupting FX markets. - If claims on the account were tradable, they could support M-SDR activity. - The account could be subject to sizeable foreign exchange risks and credit risks; past discussions stalled over who would bear potential costs associated with exchange rate and interest rate risk. - Increasing multipolarity could magnify potential SDR benefits: - Systemic risk posed by the Triffin dilemma would magnify benefits of O-SDRs by potentially lowering precautionary reserve accumulation and reducing pressure on BOPs of reserve issuers. - Higher demand for precautionary instruments could strengthen interest in O-SDR as a financing instrument. - If transition toward a multipolar system is volatile, the M-SDR could enhance stability by facilitating shifts to holdings in multiple currencies with reduced volatility in demand for any particular currency. - If currency fluctuations become more pronounced, the U-SDR could provide a more stable common standard for transactions. ### Radical redesign and limits of SDR expansion - A radically reformed SDR could conceivably serve as a global currency. - Such a redesign could introduce the SDR as an “outside” money with issuance rules or modalities (e.g., issuance limited to episodes of global stress or broader role as a global risk-free asset managing global liquidity). - The range of users could vary from current prescribed holders to private systemically-important global institutions or universal access. - Credibility and stability considerations could lead to backing by membership or the institution’s assets, among other options. - Practical and economic limits to the reach of the SDR: - Key questions include whether available backing would bind SDR issuance quantity. - Extending uses and users would require changes to the AoAs, and it is not clear whether widespread use would be desirable. - Backing the SDR carries exchange rate and interest rate risks ultimately borne by fiscal authorities; public debt sustainability could be influenced by extent of SDR liquidity provision. - Unless the world moves closer to an optimal currency area, “SDR-ization” could reduce monetary policy autonomy for individual countries and render exchange rate adjustment less effective. - The SDR policy rule could be more responsive to the global cyclical position rather than that of one country. *Source: CONSIDERATIONS ON THE ROLE OF THE SDR, INTERNATIONAL MONETARY FUND* ### 57. Technological innovation in the financial sector could affect cross-border ### Technological innovation in the financial sector could affect cross-border transactions ### Potential effects of fintech and DLTs on cross-border transactions and the IMS - DLTs can be applied to various processes in cross-border payments, lowering back-office and compliance costs and potentially boosting international financial flows. - DLT-based solutions could potentially offer significant savings but currently require conversion of fiat money to electronic ‘tokens’ for payments. - Cryptocurrencies could facilitate the transformation of cross-border payments toward DLT-based systems. - Cryptocurrencies issued by central banks (CBCCs) might be more trusted and potentially address some shortcomings of private cryptocurrencies, for example by providing a stable link to fiat money. - Technological change could: - Overcome inertial forces that support incumbent currencies, potentially speeding up transitions between existing and any new reserve assets. - If economies of scale become less important, increase the number of reserve currencies the IMS can accommodate, with a possible shift toward currencies with better payment platforms. - Boost interconnectedness, aggravating susceptibility to spillovers and swings in capital flows, with attendant financial stability concerns. - Fintech and DLTs could amplify weaknesses of the IMS discussed earlier and change assessments on the role of the SDR. ### Risks and challenges from private cryptocurrencies and DLTs - Private cryptocurrencies have characteristics that limit their reliability as money: - High price volatility curtails reliability as a store of value. - Small acceptance networks restrict use as a medium of exchange. - Limited evidence of use as a unit of account independent of fiat money. - Private cryptocurrencies present challenges to financial stability and macroeconomic management: - Could create an alternative to official fiat money and erode the monetary base. - Pose unknown risks, especially in times of stress, due to short track record, lack of public sector backing, and large valuation swings arising from unknown and in some cases rigid supply rules. - Might make circumventing exchange or capital controls easier. - Pseudo-anonymous nature can facilitate money laundering and terrorist financing. - These risks may be modest unless private cryptocurrencies and more generally DLTs become widespread. ### Institutional applications and central bank responses - DLTs can enable institutional improvements affecting cross-border flows: - Smart contracts could enable international trade without intermediaries and reduce risks of noncompliance, delay, or default. - DLTs could improve trade information (tariff codes, credit history, sanitary certificates). - Startups offer cross-border payments that include exchanges between Bitcoin and local currencies. - A DLT-based hub-and-spoke payments network could become an efficient alternative to traditional correspondence banking. - DLTs might promote financial inclusion by lowering execution and compliance costs of remittances; a consortium is building a DLT platform for trade finance aimed at small businesses. - Central banks are investigating CBCCs and DLT use cases: - Bank of Canada exercise: limited wholesale participants pledge cash in exchange for a CBDC (Cad-Coin) redeemable at par. - Monetary Authority of Singapore introduced SGD-on-ledger for the interbank market (MAS, 2017). - Some question whether improvements in monetary operations would be worth additional expenditure and risk relative to other technological investments (for example in real-time payments systems). - If issued for broader retail banking, CBCCs may expand the monetary policy toolkit because they would be part of the monetary base and, like reserves and unlike cash, can have (possibly negative) interest rates. - Central banks could alternatively issue digital currency through publicly available accounts (as done in Ecuador) rather than as tokens using DLTs. - Bank of Sweden has yet to make its choice for the eKrona. - DLTs might streamline regional cross-border interbank systems (pilot by the Central Bank of Brazil and neighbors), a potential step toward wider DLT or CBCC use for cross-border commerce. ### Box 5 — Key points on DLTs and cryptocurrencies - DLTs are the protocols and infrastructure allowing synchronized validation and record updates across a network; they can function without a centralized authority. - Blockchain is one form of DLT and powers the Bitcoin network and cryptocurrency. - Bitcoin’s market position and volatility: - At end-December 2017, cryptocurrencies’ market capitalization was approximately $600 billion (Bitcoin’s share exceeded one third and was approximately double M0 in the United Kingdom). - At the start of 2017, market capitalization was less than $20 billion. - By one estimate, the number of daily transactions was approximately 1½ million and is well short of the approximately 7 million mobile payments using M-pesa. - VCs (Virtual Currencies) are digital representations of value, issued by private developers and denominated in their own unit of account; decentralized VCs (cryptocurrencies) rely on DLTs and cryptographic techniques. - DLT-powered innovations present both opportunities (efficiency, inclusion, trade facilitation) and risks (financial stability, macro management, illicit finance). ### Implications for the SDR and considerations for broader adoption - New technologies could help kick start broader adoption of the SDR if fundamental challenges facing the SDR can be overcome. - Current SDR use is constrained by political and economic challenges rather than by technology, but fintech could help overcome initial market development barriers. - Open questions for potential SDR enhancements: - Could basing the M-SDR on an alternative payment or settlement system that does not require scale economies help overcome illiquidity and other constraints? - If the SDR were to serve as a global currency, what additional benefits might derive from an O-SDR issued as a digital token? - How might a DLT-based payments system affect the relationship between CBCCs and a digital SDR? - Market participants may see opportunity in private cryptocurrencies linked to the SDR; cryptocurrencies with purported yet tenuous links to the SDR already exist. The IMF has not trademarked the SDR and does not comment on such initiatives. ### Issues for discussion (questions posed to Directors) - Do Directors see a potentially meaningful role for the O-SDR in addressing identified gaps in the IMS and the GFSN? If so, what avenues for expanding the role of the O-SDR would Directors find most promising? How do Directors assess the concerns related to moral hazard and targeting SDR allocations to countries with more liquidity constraints? - Do Directors see a role for the M-SDR in aiding external adjustment and reducing excess reserve accumulation? Can the technical and institutional challenges highlighted in the paper be overcome with official support? - Do Directors see a case for a supporting role for the U-SDR? - Do Directors see merit in broader work on how economic and technological developments can shape the IMS, including the role of the SDR in the IMS in light of these developments? *International Monetary Fund — Considerations on the Role of the SDR (excerpts from provided content)* ### References ### pp030618role-of-the-sdr - References ### Academic and empirical studies on financial shocks, capital flows, and international transmission - Abbate, Angela, Sandra Eickmeier, Wolfgang Lemke, and Massimiliano Marcellino, 2016, “The Changing International Transmission of Financial Shocks: Evidence from a Classical Time-Varying FAVAR,” Journal of Money, Credit, and Banking 48: 573–601. - Agosin, Manuel, and Franklin Huaita, 2012, “Overreaction in capital flows to emerging markets: Booms and sudden stops,” Journal of International Money and Finance 31: 1140–1155. - Ahmed, Shaghil, and Andrei Zlate, 2014, “Capital flows to emerging market economies: A brave new world?” Journal of International Money and Finance 48: 221–248. - Ahmed, Swarnali, Maximiliano Appendino, and Michele Ruta, 2017, “Global Value Chains and the Exchange Rate Elasticity of Exports,” The B.E. 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Chinn,” Jackson Hole Economic Policy Symposium, Federal Reserve Bank of Kansas City, August 24-26, 2017. - Obstfeld, Maurice, Jonathan Ostry, and Mahvash Qureshi, 2018, “Global Financial Cycles and the Exchange Rate Regime: A Perspective from Emerging Markets,” America Economic Review Papers and Proceedings, forthcoming. ### Studies on reserve currencies, SDRs, and the international monetary system - Aizenman, Joshua, 2013, “The impossible trinity—from the policy trilemma to the policy quadrilemma,” Global Journal of Economics 2, March. - Aizenman, Joshua, Menzie Chinn, and Hiro Ito, 2016, “Monetary policy spillovers and the trilemma in the new normal: Periphery country sensitivity to core country conditions,” Journal of International Money and Finance 68: 298–330. - Bini Smaghi, Lorenzo, 2011, “The Triffin dilemma revisited,” Speech at the Conference on the International Monetary System: Sustainability and Reform Proposals, October 3. - Bordo, Michael, and Andrew Levin, 2017, “Central Bank Digital Currency and the Future of Monetary Policy,” NBER Working Paper No. 23711. - Bordo, Michael, and Robert McCauley, 2017, “Triffin: dilemma or myth?” BIS Working Paper No. 684. - Borio, Claudio, Harold James, and Hyun Song Shin, 2014, “The international monetary and financial system: a capital account historical perspective,” BIS Working Paper No. 457. - Coats, Warren, 1982, "The SDR as a Means of Payment," IMF Staff Papers 29: 422–436. - de Cecco, Marcello, and Francesco Giavazzi, 1996, “The Use of SDRs in the Financing of Official Safety Net Mechanisms,” in Michael Mussa, James Boughton, and Peter Isard, editors, The Future of the SDR in Light of Changes in the International Financial System, Washington, D.C.: IMF. - Eichengreen, Barry, 2011, Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System, New York: Oxford University Press. - Eichengreen, Barry, 2014, “International Currencies Past, Present and Future: Two Views from Economic History,” Bank of Korea Working Paper No. 2014-31. - Eichengreen, Barry, and Jeffrey Frankel, 1996, “Implications of the Future Evolution of the International Monetary System,” in Michael Mussa, James Boughton, and Peter Isard, editors, The Future of the SDR in Light of Changes in the International Financial System, Washington, D.C.: IMF. - Farhi, Emmanuel, Pierre-Olivier Gourinchas, and Hélène Rey, 2011, Reforming the International Monetary System, London: CEPR Press. - Farhi, Emmanuel, and Matteo Maggiori, 2016, “A Model of the International Monetary System,” NBER Working Paper No. 22295. - Gopinath, Gita, 2015, “The International Price System,” NBER Working Paper No. 21646. - Gourinchas, Pierre-Olivier, and Maurice Obstfeld, 2012, “Stories of the Twentieth Century for the Twenty-First,” American Economic Journal: Macroeconomics 4: 226–265. - Ocampo, José Antonio, 2010, “Building an SDR-Based Global Reserve System,” Journal of Globalization and Development 1, Article 14. - Ocampo, José Antonio, 2014, “The provision of global liquidity: The global reserve system,” WIDER Working Paper 2014/141. - Ocampo, José Antonio, 2016, “A brief history of the international monetary system since Bretton Woods,” WIDER Working Paper 2016/97. - Prasad, Eswar, 2014, The Dollar Trap: How the U.S. Dollar Tightened Its Grip on Global Finance, Princeton, NJ: Princeton University Press. - Triffin, Robert, 1960, Gold and the Dollar Crisis: The Future of Convertibility, New Haven, CT: Yale University Press. - Triffin International Foundation, 2014, Using the SDR as a Lever to Reform the International Monetary System: Report of an SDR Working Party, Louvain: Triffin International Foundation. - McCauley, Robert, and Catherine Schenk, 2015, “Reforming the International Monetary System in the 1970s and 2000s: Would a Special Drawing Right Substitution Account Have Worked?” International Finance 18: 187–206. - Tovar, Camilo, 2018, “The Sleeping Beauty? Risk-Return Characteristics of SDR-Denominated Securities Markets,” forthcoming IMF Working Paper. - Tovar, Camilo, and Tania Mohd Nor, 2018, “Reserve Currency Blocs: A Changing International Monetary System?” IMF Working Paper WP/18/20. ### Central bank digital currency, fintech, distributed ledger, and payments innovation - Bech, Morten and Rodney Garratt, 2017, “Central bank cryptocurrencies,” BIS Quarterly Review, September. - Burgos, Adenio, Jose Filho, Marcus Suares, and Rafael Almeida, 2017, “Distributed ledger technical research in Central Bank of Brazil,” Banco Central Do Brasil. - Engert, Walter, and Ben Fung, 2017, “Central Bank Digital Currency: Motivations and Implications,” Bank of Canada Staff Discussion Paper 2017-16. - He, Dong, Karl Habermeier, Ross Leckow, Vikram Haksar, Yasmin Almeida, Mikari Kashima, Nadim Kyriakos-Saad, Hiroko Oura, Tahsin Saadi Sedik, Natalia Stetsenko, and Concepcion Verdugo-Yepes, 2016, Virtual Currencies and Beyond: Initial Considerations, IMF Staff Discussion Note SDN/16/03. - He, Dong, Ross Leckow, Vikram Haksar, Tommaso Mancini-Griffoli, Nigel Jenkinson, Mikari Kashima, Tanai Khiaonarong, Céline Rochon, and Hervé Tourpe, 2017, Fintech and Financial Services: Initial Considerations, IMF Staff Discussion Note SDN/17/05. - Monetary Authority of Singapore, 2017, “Project Ubin: SGD on Distributed Ledger” - Quarles, Randal, 2017, “Thoughts on Prudent Innovation in the Payment System,” Remarks at the 2017 Financial Stability and Fintech Conference, Washington, D.C., November 30. - Scuffham, Matt, 2017, “Royal Bank of Canada using blockchain for U.S./Canada payments – executive,” Reuters Business News. - Hoguet, George and Solomon Tadesse, 2011, “The role of SDR-denominated securities in official and private portfolios”, in Portfolio and risk management for central banks and sovereign wealth funds, BIS Paper No. 58: 165-186. - Burgos, Adenio, Jose Filho, Marcus Suares, and Rafael Almeida, 2017, “Distributed ledger technical research in Central Bank of Brazil,” Banco Central Do Brasil. ### IMF publications, reports, working papers, and internal documents - International Monetary Fund, 1968, Establishment of a Facility Based on Special Drawing Rights in the International Monetary Fund and Modifications in the Rules and Practices in the Fund, reprinted in Garritsen de Vries, Margaret, 1976, The International Monetary Fund 1966–1971, The System Under Stress, Volume II: Documents, Washington, D.C.: IMF. - ______________________________, 1980, Special Drawing Rights Department – Abrogation of the Rules for Reconstitution, EBS/80/253, Washington, D.C.: IMF. - ______________________________, 2009a, Proposal for a General Allocation of SDRs, Washington, D.C.: IMF. - ______________________________, 2009b, Allocation of Special Drawing Rights for the Ninth Basic Period—Draft Executive Board Decision Managing Director Report to the Board of Governors, Washington, D.C.: IMF. - ______________________________, 2010a, Reserve Accumulation and International Monetary Stability, Washington, D.C.: IMF. - ______________________________, 2010b, The Fund’s Mandate—Future Financing Role: Reform Proposals, Washington, D.C.: IMF. - ______________________________, 2011a, Strengthening the International Monetary System—Taking Stock and Looking Ahead, Washington, D.C.: IMF. - ______________________________, 2011b, Enhancing International Monetary Stability—A Role for the SDR?, Washington, D.C.: IMF. - ______________________________, 2011c, Criteria for Broadening the SDR Currency Basket, Washington, D.C.: IMF. - ______________________________, 2011d, Assessing Reserve Adequacy, Washington, D.C.: IMF. - ______________________________, 2011e, Analytics of Systemic Crises and the Role of Global Financial Safety Nets, Washington, D.C.: IMF. - ______________________________, 2014, “Are Global Imbalances at a Turning Point?” Chapter 4 in World Economic Outlook, October, Washington, D.C.: IMF. - ______________________________, 2015a, Review of the Method of Valuation of the SDR, Washington, D.C.: IMF. - ______________________________, 2015b, “Measures which are Both Macroprudential and Capital Flow Management Measures: IMF Approach,” IMF staff note for G20, Washington, D.C.: IMF. - ______________________________, 2015c, Assessing Reserve Adequacy—Specific Proposals, Washington, D.C.: IMF. - ______________________________, 2016a, Strengthening the International Monetary System—A Stocktaking, Washington, D.C.: IMF. - ______________________________, 2016b, Adequacy of the Global Financial Safety Net, Washington, D.C.: IMF. - ______________________________, 2016c, Adequacy of the Global Financial Safety Net—Considerations for Fund Toolkit Reform, Washington, D.C.: IMF. - ______________________________, 2016d, Report of the Managing Director to the Board of Governors and the Executive Board Pursuant to Article XVIII, Section 4(c), Washington, D.C.: IMF. - ______________________________, 2016e, The Case for a General Allocation of SDRs During the Eleventh Basic Period, Washington, D.C.: IMF. - ______________________________, 2016f, Staff Note for the G20: The Role of the SDR—Initial Considerations, Washington, D.C.: IMF. - ______________________________, 2016g, Capital Flows – Review of Experience with the Institutional View, Washington, D.C.: IMF. - ______________________________, 2016h, The Chairman’s Summing Up: Adequacy of the Global Financial Safety Net—Considerations for Fund Toolkit Reform, Executive Board Meeting 16/100, November 9, Washington, D.C.: IMF. - ______________________________, 2016i, 2016 External Sector Report, Washington, D.C.: IMF. - ______________________________, 2016j, IMF Financial Operations, Washington, D.C.: IMF. - ______________________________, 2016k, Guidance Note on the Assessment of Reserve Adequacy and Related Considerations, Washington, D.C.: IMF. - ______________________________, 2017a, Collaboration Between Regional Financial Arrangements and the IMF, SM/17/190; June 29, Washington, D.C.: IMF. - ______________________________, 2017b, “Are Countries Losing Control of Domestic Financial Conditions?” Chapter 3 in Global Financial Stability Report, April, Washington, D.C.: IMF. - ______________________________, 2017c, Status of Voluntary SDR Trading Arrangements and SDR Designation Plan for the Period October 2017-September 2018, Washington, D.C.: IMF. - ______________________________, 2017d, Adequacy of the Global Financial Safety Net—Review of the Flexible Credit Line and Precautionary and Liquidity Line, and Proposals for Toolkit Reform SM/17/140, June 2, Washington, D.C.: IMF. ### Historical, institutional, and policy analyses; books and edited volumes - Allen, Polly Reynolds, 1990, “The Private ECU Markets: What They Are, Why They Exist, and Where They May Go,” Journal of Banking and Finance 14: 845–76. - Boughton, James, 2001, Silent Revolution, The International Monetary Fund, 1979–1989, Washington, D.C.: IMF. - Bordo, Michael, and Robert McCauley, 2017, “Triffin: dilemma or myth?” BIS Working Paper No. 684. - Dammers, Clifford, and Robert McCauley, 2006, “Basket Weaving: The Euromarket Experience with Basket Currency Bonds,” BIS Quarterly Review, March. - Dooley, Michael, David Folkerts-Landau, and Peter Garber, 2003, “An Essay on the Revived Bretton Woods System,” NBER Working Paper No. 9971. - Garritsen de Vries, Margaret, 1976, The International Monetary Fund 1966-1971, The System Under Stress Volume II: Documents, Washington, D.C.: IMF. - Garritsen de Vries, Margaret, 1985a, The International Monetary Fund 1972–1978, Cooperation on Trial, Volume I: Narrative and Analysis, Washington, D.C.: IMF. - Garritsen de Vries, Margaret, 1985b, The International Monetary Fund 1972–1978, Cooperation on Trial, Volume II: Narrative and Analysis, Washington, D.C.: IMF. - Hirsch, Fred, 1971, “SDRs and the Working of the Gold Exchange Standard,” IMF Staff Papers 18: 221–253. - Lindert, Peter, 1969 “Key Currencies and Gold, 1900-1913,” Princeton Studies in International Finance No. 24, Princeton, N.J.: Princeton University Press. - Nurkse, Ragnar, 1944, International Currency Experience: Lessons of the Postwar Period, Princeton, NJ: League of Nations. - Singleton, John, and Catherine R. Schenk, 2015, “The Shift from Sterling to the Dollar 1965-76: Evidence from Australia and New Zealand,” Economic History Review 68(4): 1154-1176. - Truman, Edwin, 2008, “On What Terms is the IMF Worth Funding,” Peterson Institute for International Economics Working Paper 08-11. - Truman, Edwin, 2011, “Three Evolutionary Proposals for Reform of the International Monetary System,” Remarks delivered at the Bank of Italy Conference in Memory of Tommaso Padoa-Schioppa. - Weder di Mauro, Beatrice, and Jeromin Zettelmeyer, 2017, “The New Global Financial Safety Net: Struggling for Coherent Governance in a Multipolar System,” in Essays on International Finance, Vol. 4, Waterloo, Canada: Centre for International Governance Innovation. *International Monetary Fund — References from "Considerations on the Role of the SDR"* --- _Source: https://www.imf.org/-/media/files/publications/pp/2018/pp030618role-of-the-sdr.pdf_