International monetary dimension of sterling's decline

5 December 2016

The start of the hearing of the Supreme Court in the U.K. on 5 December on whether the U.K. Parliament’s consent is required to commence official Brexit negotiations, has been accompanied by a recent appreciation of sterling. Sterling’s upward move should not mask the fact that Brexit, assuming the Court will not alter the modalities of Brexit, is set to constitute a permanent significant realignment of sterling. The market expects Britain to be a poorer and less interesting place outside the E.U. Sterling’s decline has a domestic dimension. More importantly is its international impact. Sterling’s decline marks the international monetary dimension of Britain’s decision to leave the E.U. The decline of sterling serves as a reminder that the international monetary system is in urgent need of reform. [...]

The U.S. elections and the dollar

9 November 2016

The U.S. presidential election should serve as a reminder that it is very risky for the international economy to rely on a national currency. Donald Trump’s win surprised markets and it is unclear what it means for the continuity in U.S. economic policies and therefore the dollar. In Trump’s surprisingly conciliatory victory speech he indicated that he will work with all nations in partnership. That is positive. However, the potential downside or considerable uncertainty a Trump presidency may cause remains disconcerting. The dollar may just have become much more a national currency and this should greatly concern the international economy. [...]

SDRs and international currency diversification

LSE IDEAS and Konrad Adenauer Stiftung Workshop—The Emergence of a Multipolar Currency Regime, London, 28 October 2015

Earlier this month, at the IMF Annual Meetings in Lima, it was almost bewildering to witness how universal concerns were about the effect on the international economy of an increase in the policy rate of the Federal Reserve. Those concerns serve as a critical reminder of the old and well known dilemma of using national currencies to manage international liquidity. In my brief remarks I will focus on the IMF Special Drawing Rights (SDRs) arguing that SDRs could usefully serve as a framework to promote greater international currency diversification.

Renminbi internationalisation: Need for a new gentlemen's agreement?

Conference—China's Financial Stability and Monetary Policy Outlook, Beijing, 29 August 2015

The impact of renminbi internationalisation on the global financial system will likely depend in large part on whether the renminbi will add or subtract stability to central banks' reserve allocation patterns. This will naturally be contingent on renminbi conversion pressure, that is, whether adoption of the renminbi as a reserve currency will be sustained. The threat of large-scale reserve currency conversions has been a concern for a long time and a cornerstone for managing international liquidity has remained tied to some understanding about limited reserve currency convertibility. Milton Friedman called it "the gentlemen's agreement among central banks not to press for conversion […]."

IMF SDR valuation review: A test nobody can pass

9 August 2015

The IMF Executive Board deliberated on 29 July in informal session about next steps to conduct the 2015 quinquennial SDR valuation review. The IMF staff document guiding the review concentrates on determining whether the renminbi is a freely usable currency as necessary inclusion criterion. The review is conducted seemingly on technical considerations only on the basis of the existing inclusion criteria and does not propose revisiting those. This signals a bias against innovation. It seems to represent an extraordinary missed opportunity in light of actual and expected changes in the international monetary system. This may not be the IMF staff’s mistake.

Greece, SDR and the need for a new multilateralism

BNE Intellinews, 20 April 2015

The International Monetary Fund/World Bank Spring Meetings in Washington DC over an April weekend felt mostly like a routine affair. Persistent concerns about a "mediocre" global economic outlook were voiced and duly corresponding policy recommendations made. At least two issues though were more unusual: the quinquennial special drawing rights (SDR) valuation review and a possible default of Greece to the IMF. Both have caused considerable background tussles. [...]

Fed has built a thorny central bank divide

Financial Times, 6 November 2014

Top Federal Reserve officials […] underlined the divide between central banks that have access to the Fed’s dollar swap facility and those that do not [have] a Fed backstop . [...]

International illiquidity and a BRICS payments union

BRICS Economic Think Tank Forum, Beijing 6 November 2014

Ladies and Gentlemen

It is a great pleasure to participate in this timely initiative to reflect on the international financial architecture through the prism of the BRICS countries. The considerable advances BRICS countries have made in the world economy remain in stark contrast to their role in the international financial system. There are few areas where this is more pronounced that in the international monetary sphere. The world economy has remained highly dependent on a narrow set of national currencies to conduct cross border financial transactions. This constitutes a critical vulnerability and disadvantage for BRICS countries. Commemorating the 70-year anniversary of the Bretton Woods Conference this year, it is an opportune moment to think about needed reforms of the international financial architecture. I will try to make the case for a BRICS payments union.[...]

Why does the international monetary system matter?

Johns Hopkins School of Advanced International Studies (SAIS), Washington, D.C. 9 October 2014

Ladies and Gentlemen

It is a great pleasure to be here at U.S. Korea Institute at SAIS. I’m most grateful to the organisers for the opportunity to moderate this outstanding panel. Before we start the discussion, I would like to offer some short introductory remarks focusing on what the Bretton Woods Conference was about, why it should matter to the public and why it offers critical insights for international investors. [...]

Internationalisation of currencies, capital account opening and the SDR basket

China Society for Finance and Banking, Hangzhou, 17 May 2014

Ladies and Gentlemen,

My remarks will focus on the SDR basket to reflect on the role it plays today and more importantly could play. The internationalisation of currencies, capital account opening and the SDR basket are naturally linked to one another. Capital account opening constitutes to some extent a necessary condition for currency internationalisation and major international currencies should normally be eligible as constituents of the SDR basket. Yet, one of the most salient features of the international economy is the fact that very few currencies have become truly international despite important and widespread capital account openings.[...]

Dollar-based system is inherently unstable

Financial Times, 2 October 2013

The international monetary system does not work as intended. An international economy relying predominantly on one currency is inherently unstable. This is amply demonstrated by the recent turbulence in foreign [...].

40 years after the end of the dollar standard

27 September 2012

The upcoming 2012 IMF Annual Meetings are unlikely to produce much excitement. Even though persistent talks about currency wars and renewed fears of protectionism may cause severe disruptions to international trade and investments and are normally the sorts of issues that raise alarm bells with policy makers. Exactly 40 years ago at the 1972 IMF Annual Meetings, then U.S. treasury secretary George Shultz did shock the international community with a bold plan to reform the international monetary system and end the special role of the dollar as a reserve currency.[...]

Republican gold

3 September 2012

The recently aired proposal by the Republican Party to establish a Gold Commission to assess a return of the U.S. to the gold standard may seem weird—and it is—but does serve as a most useful reminder that current monetary and exchange rate policy arrangements are indeed increasingly perceived as deeply dissatisfactory. Unprecedented monetary expansion, the blurring divisions between monetary and fiscal policies, persistent large global imbalances suggest considerable scope for policy improvements. It also recalls that monetary policy autonomy is not a birthright and that we may enter a renewed period of decreasing central bank independence. However, at probably no point in recent economic history would a  return  to  the  gold standard appear more far-fetched and policies more unsupportive. Sadly rather than looking forward a debate about gold is strictly backward. [...]

2010 SDR basket review

16 November 2010

The IMF is working on a new SDR basket to take effect on January 1, 2011 with a decision on the new basket probably around mid- November. There are rumours that a revised SDR basket may comprise emerging markets currencies for the first time again since 1980. This would provide a strong signal that emerging markets currencies are on the rise and need to be taken seriously. It would also be illustrative of what the IMF aims to achieve with the SDRs. Following the recent promotion of SDRs through the large allocation of August 2009 and more importantly interest in the role of SDRs voiced by key emerging markets notably China and Russia, SDRs seem back from the wilderness. [...]

"Currency wars"

29 September 2010

Brazilian finance minister Mantega’s warning on September 27 of a global currency war is only another indication that exchange rates are seriously out of whack. The foreign exchange market intervention by the ministry of finance of Japan on September 15 earlier hinted that exchange rates have moved to the top of policy makers’ concerns but could also be interpreted as an act of desperation or frustration that there is no common position on exchange rates.[...]

Eurodollar jitters and emerging markets

11 August 2010

The most important price of the international economy has become increasingly jittery. The dollar/euro exchange rate volatility has reached its highest level since the final collapse of Bretton Woods of fixed exchange rates. Previous episodes of heightened eurodollar volatility have coincided with or an- nounced a major turning point in the eurodollar exchange rate. The importance of eurodollar suggests that there is sub- stantial uncertainty at the core of the international economy including but not limited to growth, fiscal policy and monetary policies. Its significance for the exchange market also suggests that it may risk contaminating other currency crosses. [...]

The case for reserve currency competition

Central Banking Journal, May 2010

In January 2010, the French president, Nicolas Sarkozy, said: “We need a new Bretton Woods, we cannot put finance and the economy back in order if we let the disorder of currencies persist.” He is right. The international monetary system needs change. His call follows earlier proposals by the Chinese and Russian authorities to foster international currency diversification. Why is change needed? [...]

Is QE dollar supportive?

28 February 2010

Some emerging markets policy makers and others have been protesting repeatedly that the U.S. Federal Reserve’s policy of quantitative easing (QE)—or credit easing—causes a weaker dollar and channels unwanted hot money flows into emerging markets. Actually, the opposite may be true. [...]

"Putting money where the G20's mouth is?"

11 November 2009

The steady depreciation of the dollar has fuelled renewed doubts about the dollar’s status as the dominant reserve currency. Mean- while, central banks have continued to purchase U.S. treasury secu- rities in droves. While they may no longer have full confidence in the dollar as the dominant anchor of the international monetary system, their net purchases appear to signal otherwise. [...]

Case for multiple reserve currencies

9 September 2009

The debate about the future of the international monetary system is taking shape. It has been driven in large part by increasing concerns about the U.S. dollar as a credible anchor for the international economy. It also emerged amid mounting dissatisfaction that the current international monetary system is prone to instability and potential collapse. Consensus now seems to have formed on moving towards adopting a multi-reserve currency system. This would potentially have widespread implications for the international economy and be the clearest sign that the status quo centered around the U.S. dollar is bound for change. [...]

Rise and fall of reserve currencies

26 August 2009

Reserve currencies move around more than meets the eye. The fall of the British pound and coincident rise of the dollar during the interwar and immediate post-war period is often portrayed as the only historic precedent of a change in international currency hegemony. Yet, the rises of the German mark and Japanese yen during the1970s and 1980s suggest that central banks are willing to undertake significant adjustments to their reserve portfolios. [...]

What role can the SDR play today?

15 May 2009

The IMF’s Special Drawing Right (SDR) is seeing an unexpected revival. Only in 2006, the Managing Director of the IMF concluded that there was not the necessary support from IMF member countries to seek issuance of SDRs, reflective of what had been a steady decline in the relevance of the SDR since the 1980s. [...]

Need for a new international monetary system?

28 April 2009

The global financial crisis has caused significant interest and exchange rate volatility. Both can be deemed failures to manage global liquidity. This risks causing commercial and trade disruptions, lead to competitive devaluations and fuel protectionism thus undermining prospects of a sustained recovery. Many commentators have attributed those market dislocations to a failure of the international monetary system, the set of rules that govern cross-border monetary transactions. [...]

Reserve currencies and solving the new Triffin dilemma

Central Banking Journal, February 2009

One of the most puzzling aspects of the present global crisis is the fact that despite the vast accumulation of central bank reserves, mostly denominated in dollars, the international economy had been subject to a severe and sudden shortage of dollar liquidity. The increasing share of the official sector in US Treasury securities has raised repeated concerns – in particular with regard to its effect on interest rates, the dollar and valuation of central banks’ balance sheets.[...]

Fear of intervening

16 November 2008

One of the most puzzling phenomena of the current financial crisis is the fact that despite the very large accumulation of international reserves mostly denominated in dollars, the international economy has suffered a severe shortage of dollar liquidity. The unexpected acute dollar shortage has led to significant downward pressure on many currencies. Such sudden dollar shortages can normally be accommodated by selling international reserves. Yet, central banks have seemingly not been able to fully mobilise their reserve assets. [...]

U.S. Federal Reserve swap lines

10 November 2008

The U.S. Federal Reserves has extended swap lines to several central banks including to Brazil, Singapore and Korea. The Fed swap network has been in place for decades but its revival has been the clearest indication yet that the Fed is concerned about global dollar liquidity and its potentially disruptive effect for the global financial system. [...]

Central banks and emerging markets liquidity

27 July 2008

Central banks have traditionally attached a high priority to market liquidity for the investment of their foreign exchange reserves. This is due in part to criteria governing the definition of central bank reserves. While many central banks have tiered their reserves to allow differential allocation criteria and investment horizons, liquidity considerations have remained important. Very large central banks contemplating building sizeable portfolios in emerging markets assets, generally in excess of US$10 billion, are concerned that they would have to overly compromise on liquidity and that significant allocations may cause unwanted price movements. [...]

Foreign reserves carry costs

5 March 2008

Holding international reserves can be quite costly. The financial implication of holding reserves of course only represents one aspect of reserve holding and many central banks would argue that the benefits far outweigh the costs. However, reserves affect central banks’ profit and loss account and as such do have an immediate incidence on the financial soundness of central banks and as such on the effectiveness of central banks. [...]