Why Does the World Need a Reserve Asset with a Hard Anchor?

Dongsheng Di (), Warren Coats () and Yuxuan Zhao ()
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Dongsheng Di: 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
Yuxuan Zhao: Agriculture Global Practice, International Bank for Reconstruction and Development (IBRD), Washington, DC, USA

Frontiers of Economics in China-Selected Publications from Chinese Universities, 2017, vol. 12, issue 4, 545-570

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 (search for similar items in EconPapers)
JEL-codes: E42 F02 F33 (search for similar items in EconPapers)
Date: 2017
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