Reforming the Global Reserve System<sup>1</sup>

José Antonio Ocampo

in Time for a Visible Hand

Published in print January 2010 | ISBN: 9780199578801
Published online February 2010 | e-ISBN: 9780191723285 | DOI:

Series: Initiative for Policy Dialogue

Reforming the Global Reserve System1

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Ocampo argues that the current global reserve system exhibits three fundamental flaws. First, it shows the deflationary bias typical of any system in which all the burden of adjustment falls on deficit countries (the anti‐Keynesian bias). Second, it is inherently unstable due to two distinct features: the use of a national currency as the major reserve asset (the Triffin dilemma) and the high demand for “self‐protection” that developing countries face (the inequity‐instability link). The latter is related, in turn, to the mix of highly pro‐cyclical capital flows and the absence of adequate supply of “collective insurance” to manage balance of payments crises, which generate a high demand for foreign exchange reserves by developing countries. This implies, third, that the system is inequitable (the inequity bias), and that such inequities have grown as developing countries have accumulated large quantities of foreign exchange reserves. On the basis of this, it argues for a system based on the counter‐cyclical issues of Special Drawing Rights (SDRs) that finance IMF facilities, and some possible “development links” in SDR allocations.

Keywords: global monetary system; global reserve system; special drawing rights; self‐insurance; self‐protection

Chapter.  11052 words.  Illustrated.

Subjects: Macroeconomics and Monetary Economics

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