Fu­ture of the In­ter­na­tional Mone­tary Sys­tem

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Eco­nomic ex­perts are at­ten­tive to­ward the cre­ation of a new global re­serve sys­tem. A well func­tion­ing global re­serve sys­tem en­sures a com­monly ac­cepted source of liq­uid­ity that the world econ­omy needs in or­der to flour­ish. It fa­cil­i­tates bal­ance of pay­ments ad­just­ments and pro­vides an in­ter­na­tional frame­work for con­struct­ing sound national eco­nomic poli­cies. Its key el­e­ments in­clude ex­change rate de­ter­mi­na­tion, pay­ments, ad­just­ments and man­age­ment of in­ter­na­tional liq­uid­ity re­quire­ments.

The long fray­ing US dol­lar-based re­serve sys­tem ap­pears to be the most ob­vi­ous rea­son for this tran­si­tion. The last decade saw that the US dol­lar no longer seemed a good hedge; it proved to be volatile and de­clin­ing. Also the 2008 cri­sis fur­ther un­der­mined con­fi­dence in the US econ­omy and its man­age­ment. There­fore, a mul­ti­ple currency re­serve sys­tem was as­sumed as a way out.

The cre­ation of the euro and the grow­ing eco­nomic clout of the BRIC na­tions (Brazil, Rus­sia, In­dia, China) over the past decade, how­ever, has led to a new environment in which a mul­ti­po­lar global mone­tary sys­tem is be­gin­ning to emerge. If this be­comes pos­si­ble, then the fu­ture mul­ti­ple global re­serve sys­tem is one in which the dol­lar, the euro and the ren­minbi are pre­dicted to be con­se­quen­tial in­ter­na­tional and re­serve cur­ren­cies. The in­ter­na­tional mone­tary sys­tem is grow­ing more mul­ti­po­lar be­cause the world econ­omy is grow­ing in­creas­ingly mut­lipo­lar.

Though such a mone­tary sys­tem is not nec­es­sar­ily a bad thing in it­self, as the mo­nop­oly of power in in­ter­na­tional fi­nance and com­pe­ti­tion may lead to bet­ter poli­cies but it has in­trin­sic dan­gers that re­quire a strength­en­ing of global in­sti­tu­tions. Ex­perts also warn that a mul­ti­ple in­ter­na­tional currency sys­tem would be dan­ger­ously un­sta­ble. With dol­lars, euros and even­tu­ally ren­minbi all be­ing sub­sti­tutes for one an­other, their ex­change rates will be­come dan­ger­ously volatile. The sub­sti­tutabil­ity will cre­ate the temp­ta­tion to shift er­rat­i­cally be­tween them. Even a lim­ited loss of con­fi­dence in the poli­cies of one of the re­serve currency could cause cen­tral banks to rush out of the currency, ag­gra­vat­ing fi­nan­cial dif­fi­cul­ties in the par­tic­u­lar prob­lem coun­try.

How­ever, a re­port by Uk-based think tank Chatham House and the ESRC World Econ­omy and Fi­nance Pro­gramme has pointed out ex­ist­ing flaws in the dol­lar de­pen­dent sys­tem, which also shows a con­flict be­tween do­mes­tic pol­icy goals and in­ter­na­tional obli­ga­tions.

The re­port high­lights the grow­ing mul­ti­po­lar world, as well as the ar­gu­ment over the use of a supra­na­tional currency in the form of Spe­cial Draw­ing Rights. SDRS are sup­ple­men­tary for­eign ex­change re­serve as­sets de­fined and main­tained by the In­ter­na­tional Mone­tary Fund (IMF). Not a currency, SDRS in­stead rep­re­sent a claim to currency held by IMF mem­ber coun­tries for which they may be ex­changed. The SDR’S value is based on a bas­ket of four key world cur­ren­cies, cur­rently the euro, yen, ster­ling and dol­lar. The study also out­lines cer­tain rec­om­men­da­tions in favour of a mul­ti­c­ur­rency re­serve sys­tem with a greater use of SDRS si­mul­ta­ne­ously and the IMF’S en­hanced role, Ex­pan­sion of SDR sup­ply in a fre­quent and pre­dictable way, at least in line with the global gross do­mes­tic prod­uct and grad­u­ally re­duc­ing the ac­cu­mu­la­tion of dol­lars. To cre­ate a po­lit­i­cally-independent In­ter­na­tional Mone­tary Pol­icy Com­mit­tee to make rec­om­men­da­tions to the IMF’S board on new SDR is­sues and bas­ket com­po­si­tion. To es­tab­lish a “sub­sti­tu­tion ac­count” at the IMF where mem­ber coun­tries can de­posit dol­lars, euros, yen or ster­ling and re­ceive equiv­a­lent amounts in SDRS based on pre­vail­ing FX rates. To en­cour­age wider use of SDRS by al­low­ing SDR ac­counts to be opened by the pri­vate sec­tor; cre­at­ing a set­tle­ment sys­tem; and aid­ing the de­vel­op­ment of SDR fi­nan­cial in­stru­ments. • To re­bal­ance IMF Ex­ec­u­tive Board to boost the or­ga­ni­za­tion’s cred­i­bil­ity and as­sist in the wider use of SDRS. • To man­date the IMF for ar­bi­tra­tion on is­sues of currency mis­align­ments and mone­tary co­or­di­na­tion, ful­fill­ing the same role for global mone­tary pol­icy that the World Trade Or­ga­ni­za­tion per­forms for trade.

With the fu­ture of the in­ter­na­tional mone­tary sys­tem yet un­de­cided, ex­perts sug­gest a re­gional and global co­her­ence to­wards work­able re­forms of the global re­serve sys­tem. The ma­jor re­serve currency na­tions need to co­op­er­ate much more closely and ex­pand the scope of their mone­tary pol­icy ob­jec­tives be­yond do­mes­tic in­fla­tion to in­clude global fi­nan­cial sta­bil­ity

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