Future of the International Monetary System
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