Policymakers should consider ways of shifting from a dollar-centric global monetary system to one with a wider range of reserve assets and some form of insurance that would reduce reserve accumulation, IMF economists say.
The worst economic downturn in 70 years has revived concerns over a monetary non-system where the weaknesses have amplified as emerging economies built up reserves to self-insure against capital account crises in recent years, the economists say.
The economists laid out their thoughts in a paper that does not commit the International Monetary Fund as an institution and essentially amounts to a review of options governments may want to consider as they seek to deliver on G20 pledges to push for a more balanced economic system.
To ease reserve demand, policymakers could explore promoting alternatives ranging from third-party insurance to a system where countries could borrow from global or regional reserve pools through a lender of last resort.
The latter was a role the IMF could play but only if it had far greater resources, said the paper, which noted that academic estimates of the necessary resources were anything from $1 trillion to limitless.
In addition to the IMF, other insurance arrangements, such as regional pools and bilateral swaps, would be useful complements, although with more limited scale, scope for risk sharing, and surveillance arrangements, says the paper.
Many of the ideas aimed at attenuating demand for reserves would only partially address the problem, however, and there was still a need to consider alternative reserve currency systems in place of the currency dollar-based one, it says.
Alternatives ranged from a system of multiple or competing reserve currencies with no dominant one, a system based on the IMF's SDR unit of account that pools the main reserve currencies or a totally new global currency that trades alongside others.
A multi-currency system could emerge with time even if there were few precedents and the most likely contenders were the euro in the first instance and later on the yen and yuan, the paper says.
Such a system would impose policy discipline on reserve issuers, as concerns about the value of one currency could lead to a shift towards the others, it says.
The 'exorbitant privilege' currently enjoyed by the United States would be spread across a few more countries' currency areas, it says.
The SDR -- which is a claim on a basket of currencies but not a currency itself -- is enjoying a renaissance after falling into near oblivion for decades, the economists say in the paper.
By being available as a composite product, the SDR also offers a convenient means of reserve diversification and stable store of value, the paper says, noting however that governments would have encourage and subsidies development of a private SDR market -- that is, private borrowers issuing SDR-denominated debt.
More radically, another option would be a new currency used in international transactions and issued by an international monetary agency quite different from today's IMF, the paper says.
Disconnected from the economic problems of any individual country and with a balance sheet backed by the membership of the institution, this currency could serve as the global risk-free asset.
However, a solution of this nature seems so impossibly taxing of national sovereignty that it would be tempting to dismiss it as utopian.
Yet, a monetary institution with even more demanding features -- the ECB -- is celebrating its 11th anniversary this year. If an SDR-based system were to emerge at some stage, taking the next step to a sui generis global currency may seem less of a giant leap than from today's vantage point.