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Frontiers of Economics in China

Front. Econ. China    2017, Vol. 12 Issue (4) : 545-570     https://doi.org/10.3868/s060-006-017-0023-7
Orginal Article |
Why Does the World Need a Reserve Asset with a Hard Anchor?
Dongsheng Di1(), Warren Coats2(), Yuxuan Zhao3()
1. School of International Studies, Renmin University of China, Beijing 100872, China; and also a research fellow with International Monetary Institute of Renmin University of China
2. Former chief of the SDR Division of the Finance Department, IMF
3. Agriculture Global Practice, International Bank for Reconstruction and Development (IBRD), Washington, DC, USA
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Abstract

From the 1970s, the global currency system has two features: the use of one or a few sovereign currencies as the global reserve asset and the floating exchange rate regime between major currencies. This paper points out that the costs of the dollar’s use as an international reserve currency exceed the benefits for both the US and the rest of the world. These costs include the exporting of American manufacturing as a byproduct of its current account deficit needed to supply its currency to the rest of the world. In addition to the detriment to trade from unpredictable exchange rate fluctuations, the termination of the U.S. obligation to redeem its currency for gold also removed an important restraint on deficit financing for the US and many other countries in the short-run, thus promoting excessive leverage that was a major contributor to the 2008 financial crisis. The paper suggests replacing several main countries’ currencies in international reserves with a real Special Drawing Right (SDR) issued according to currency board rules.

Keywords reserve currency      exchange rate volatility      exorbitant privilege      fiscal discipline      hard anchor      balance of payments      real SDR     
Issue Date: 08 December 2017
 Cite this article:   
Dongsheng Di,Warren Coats,Yuxuan Zhao. Why Does the World Need a Reserve Asset with a Hard Anchor?[J]. Front. Econ. China, 2017, 12(4): 545-570.
 URL:  
http://journal.hep.com.cn/fec/EN/10.3868/s060-006-017-0023-7
http://journal.hep.com.cn/fec/EN/Y2017/V12/I4/545
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