Reforming the International Monetary System in the 1970s and 2000s: Would an SDR Substitution Account Have Worked

McCauley, R. N. and Schenk, C. R. (2014) Reforming the International Monetary System in the 1970s and 2000s: Would an SDR Substitution Account Have Worked. Working Paper. Asian Development Bank, Centre for International Governance Innovation and the Hong Kong Institute for Monetary Research.

McCauley, R. N. and Schenk, C. R. (2014) Reforming the International Monetary System in the 1970s and 2000s: Would an SDR Substitution Account Have Worked. Working Paper. Asian Development Bank, Centre for International Governance Innovation and the Hong Kong Institute for Monetary Research.

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Abstract

This paper analyzes the discussion of a substitution account in the 1970s and how the account might have performed had it been agreed in 1980. The substitution account would have allowed central banks to diversify away from the dollar into the IMF’s Special Drawing Right (SDR), comprised of US dollar, Deutschmark, French franc (later euro), Japanese yen and British pound, through transactions conducted off the market. The account’s dollar assets could fall short of the value of its SDR liabilities, and hedging would have defeated the purpose of preventing dollar sales. In the event, negotiators were unable to agree on how to distribute the open-ended cost of covering any shortfall if the dollar’s depreciation were to exceed the value of any cumulative interest rate premium on the dollar. As it turned out, the substitution account would have encountered solvency problems had the US dollar return been based on US treasury bill yields, even if a substantial fraction of the IMF’s gold had been devoted to meet the shortfall at recent high prices for gold. However, had the US dollar return been based on US treasury bond yields, the substitution account would have been solvent even without any gold backing.

Item Type:Research Reports or Papers (Working Paper)
Additional Information:The BRICS and Asia, Currency Internationalization and International Monetary Reform - Paper no. 9
Status:Published
Glasgow Author(s) Enlighten ID:Schenk, Professor Catherine
Authors: McCauley, R. N., and Schenk, C. R.
College/School:College of Social Sciences > School of Social and Political Sciences > Economic and Social History
Publisher:Asian Development Bank, Centre for International Governance Innovation and the Hong Kong Institute for Monetary Research
Copyright Holders:Copyright © 2014 Bank for International Settlements
Publisher Policy:Reproduced in accordance with the copyright policy of the publisher

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