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Published: 22-01-2013, 14:47

Special drawing rights: Role of SDRs

Special drawing rights

From their onset, SDRs could be held only by governments, central banks, and official bodies such as the IMF. The original SDR allocation of 9.3 billion SDRs was disbursed among the IMF members according to predetermined quotas over a two-year period (1970 72). An additional amount of 12.1 billion SDRs was allocated and distributed between 1979 and 1981. SDRs have not been allocated since. As a result of the reluctance among the IMF stakeholders to allocate new SDR issues, SDRs now amount to only about 1 percent of the international reserves held worldwide. SDRs clearly did not end up as the primary reserve asset in the global monetary system as envisioned in the IMF Article of Agreements (XXII). In addition, Clark and Polak (2004) suggest that the concerns of international liquidity (i.e., the worldwide lack of sufficient gold reserves) that led to the establishment of the SDRno longer apply.

Although the original rationale for the creation of SDRs is no longer relevant to the post Bretton Woods system of flexible exchange rates, other reasons for their existence as reserve assets remain. Since capital accounts are now much more open than ever before (with the possible exception of 1880 1914), reserves are seen as ameans to prevent fluctuations in the trade balance and domestic consumption that would be required in the face of fluctuations in capital flows. SDRs enable countries to diversify their reserve holdings, andmore important for developing countries, the SDR can be held at a much lower cost than major currencies such as the U.S. dollar, the Japanese yen, the euro, or the British pound. This is especially true for the lowest-income countries, which are virtually cut off from the international financial markets and for whom the only means of obtaining reserves is running trade surpluses through reductions in imports.

Another possible future use for the SDR is as an alternative reserve asset that can be issued broadly in case of a dramaticU.S. dollar crash (Lissakers 2006). A dollar crash, a plausible event in light of the persistent U.S. balance of payment deficits, and the central role of the dollar as a reserve currency (roughly 70 percent of all foreign reserves are held in U.S. dollar denominated assets), might create the conditions for a general flight from the dollar; this means that the question of constraints on international liquidity might reemerge. See also balance of payments; Bretton Woods system; dollar standard; dominant currency; global imbalances; gold standard, international; hot money and sudden stops; international liquidity; InternationalMonetary Fund (IMF); international reserves; reserve currency; Triffin dilemma; twin deficits; vehicle currency FURTHER READING Clark, Peter B., and Jacques J. Polak. 2004. ‘‘International Liquidity and the Role of the SDR in the International Monetary System.’’ IMF Staff Papers 51 (1): 49 71. discussion of the 1969 70 introduction of SDR, written by senior IMF staffers at the time who argue for a re invigoration of the SDR allocation program. Goldstein, Henry N. 1969. ‘‘Gresham’s Law and the De mand for NRUs and SDRs.’’ The Quarterly Journal of Economics 83 (1): 163 66. A contemporary argument supporting the introduction of SDRs. International Monetary Fund. 2006a. ‘‘A Factsheet Special Drawing Rights (SDRs).’’ Downloadable from http://www.imf.org/external/np/exr/facts/sdr.htm (ac cessed August 15, 2006).Contains updated information about the current status and history of SDRs. International Monetary Fund. 2006b. ‘‘SDR Valuation.’’ Downloadable from http://www.imf.org/external/np/ fin/rates/rms sdrv.cfm (accessed August 17, 2006). Contains daily updates on the value of SDRs. International Monetary Fund. 2006c. SDR Interest Rate Calculation. Downloadable from http://www.imf.org/ external/np/fin/rates/sdr ir.cfm (accessed August 17, 2006). Contains details on the current SDRinterest rate. Lissakers, Karin. 2006. ‘‘Is theSDRaMonetaryDodo? This Bird May Still Fly.’’ In Reforming the IMF for the 21st Century, edited by Edwin M. Truman. Washington, DC: Institute for International Economics, Special Re port #19. Written by a former U.S. executive director at the IMF, the paper advocates the allocation of SDRs in the case of a U.S. dollar crash. The book includes other useful discussions on various aspects of IMF reform proposals. ILAN NOY

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