Concluding Remarks by Dominique Strauss-Kahn, Managing Director of the International Monetary Fund, at the High-Level Conference on the International Monetary System
IMF News, May 11, 2010
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- Published: May 11, 2010
Key Issues Identified
- Imperfections of the international monetary system that need to be addressed to increase resilience:
- Volatile capital flows: episodes of large flows and “sudden stops” create significant problems for economic management.
- Adjustment: no automatic or smooth adjustment mechanism to current account imbalances; when adjustment occurs it is asymmetric, falling more heavily on deficit, non reserve issuing countries, rather than on surplus countries or reserve issuing deficit countries.
- Narrow asset supply: reliance on a narrow set of national currencies concentrates transmission of shocks from the “core” and leads to runs into those currencies during liquidity crises.
- Reserve accumulation: a three-fold increase globally in reserves over the past 10 years; for many EMs, reserve coverage far in excess of traditional norms, reaching nearly 5 times short-term external debt in 2008.
- Systemic trade-offs noted:
- Accumulating reserves is costly—consumption and investment are foregone as part of national savings are invested in safe, low-yielding international assets.
- If many countries pursue current account surpluses as counterparts to reserve accumulation, an aggregate deflationary impact may emerge if the rest of the world is no longer willing to incur current account deficits.
Possible Reforms — Demand Side (reducing drivers of reserve accumulation)
- Reserve adequacy:
- The IMF could give guidance on desirable ranges of precautionary reserve levels taking into account country circumstances to reduce “keeping up with others” dynamics.
- Better surveillance of capital flows:
- Fill information gaps in cross-border flows and exposures to enhance understanding of volatile capital flows and measures to address them, possibly in a multilateral context.
- Improved financial safety net:
- The IMF could provide better insurance facilities (e.g., improvements to the FCL, a Precautionary Credit Line).
- Support regional financial arrangements.
- Develop a Multi-Country Swap/Credit Line instrument for systemic crises that provides liquidity quickly and simultaneously to several countries with strong underlying fundamentals and policies.
- Multilateral framework:
- A multilateral framework among countries to implement needed policy adjustments for effective operation of the system (the G-20 MAP cited as a step).
- Ideas to address non-precautionary reserve demand include a more systemic role for the SDR and, more controversially, penalties (e.g., a reserve requirement on “excess” reserves or a tax on persistent current account imbalances beyond a certain threshold), though penalties have a poor implementation history.
Possible Reforms — Supply Side (increasing and diversifying reserve assets)
- Move toward a more multi-polar reserve system over time is expected by many, but:
- Near term: no clear contenders to match the depth and liquidity of the U.S. dollar markets.
- Encourage more widespread use of alternative reserve assets (e.g., euro, yen, renminbi) and enhance EM assets (e.g., through pooling arrangements, or a repo window).
- A more multi-polar system may reduce single-country risk but could increase exchange rate volatility with potentially deleterious effects on resource allocation.
- Reserve holders may need to adjust portfolios gradually; mechanisms for collaboration (e.g., reporting on currency composition) could bolster adjustment stability.
- Greater role for the SDR:
- Advantages: value determined in terms of a basket, diversifies currency and interest rate risks, offers more stable store of value and unit of account attributes.
- Requirements to move to a more SDR-based system:
- (i) increased supply,
- (ii) greater liquidity,
- (iii) transparent, automatic rules for determination of the currency composition of the SDR basket for wider private sector use.
- Complementary measures: issuance by governments of SDR-denominated bonds or activation of a substitution account to promote use of the SDR basket.
- Ultimate option — a new global currency issued by a global central bank:
- Could provide a nominal anchor and risk-free asset independent of national currencies and serve as a lender of last resort.
- Requires considerably more debate on merits, safety valves, feasibility, and very substantial multilateral effort; currently judged far from attainable.
Benefits, Costs, and Priorities for Action
- Benefits of current IMS:
- Discretion in choice of exchange rates, reserves policies, and policies on capital flows has helped achieve domestic objectives and underpinned a large expansion in global trade and global output.
- Costs and persistent shortcomings:
- Absence of automatic adjustment to imbalances and uneven provision of liquidity caused by volatile capital flows; rapid reserve accumulation concentrated on a narrow supply of assets.
- Readily implementable steps to strengthen the system:
- Better surveillance of capital flows and analysis of spillovers.
- An improved global financial safety net.
- An enhanced role for the SDR.
- Governance reform of the IMF is a critical ingredient for the IMF to play an effective role.
- Continued debate needed on more ambitious options:
- A multilateral framework for capital flows.
- A sustained move to an SDR-based system, which would require considerable coordination.
Source: Concluding Remarks by Dominique Strauss-Kahn, Managing Director of the International Monetary Fund, at the High-Level Conference on the International Monetary System — Zurich, May 11, 2010 (As prepared for delivery).