REFORMING THE GLOBAL RESERVE SYSTEM

The current global reserve system has three fundamental flaws: (1) the deflationary bias as the burden of adjustment falls on deficit countries; (2) inherent instabilities associated with the use of a national currency as the major reserve asset and the high demand for foreign exchange reserves by developing countries, due in turn to pro-cyclical capital flows and inadequate “collective insurance”; and (3) growing inequities associated with resource transfers to reserve currency issuing countries. 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. JEL Classification: F02-International Economic Order, F33-International Monetar