Reserve Currency

In this paper we discuss why and how Russia needs to shield herself from the negative consequences of the US dollar’s worldwide financial domination. The apparent political will of the Russian regime to transform the ruble into a reserve currency has to cope with the objective reality of a ruble perceived as a nonreliable store of value. The proposition of starting to settle energy exports in rubles is explored. The paper is organized around a series of chapters dealing with political, economic and financial matters pertinent to the actual Russian predicament, including an analysis of the ruble’s weaknesses and strengths. In the conclusion the author argues that the ruble in its present form is way too weak to become a hard currency and therefore a reserve currency. The case for linking the ruble to gold is proposed in parallel with a cautious increment of the ruble’s use in Russia’s energy contracts, bearing in mind that the Russian economic reality is partially that of a petrostate.

The international role of the US dollar is deeply entrenched. To change that, Europe-and Germany in particular-would need to rethink some core economic policies. The dominance of the US dollar is a standing provocation to those who envision a more significant role for the EU in world affairs. The European economy is comparable in size and sophistication to the US economy, but its currency, the euro, plays second fiddle. For a long time, the dollar's dominance did not seem to matter much. It did bring the US major benefits: cheap and almost limitless funding for its government, firms and consumers; and the ability to impose effective international sanctions, as the dollar's dominance meant that no firm could violate them without risking major fines. But the US was not exploiting those advantages at the expense of Europe. Now the Trump administration is weaponising economic policy, making the euro's standing in global markets a question of foreign policy, rather than simply of economics. But the ambition to give the euro a greater role in global markets faces huge economic and political obstacles. Not only is the dollar's role in the world economy deeply entrenched. The policy changes that would bring about the conditions necessary for growing the euro's role-an ample supply of European safe assets and a European Central Bank (ECB) that recognises its worldwide responsibilities-would meet fierce resistance, especially in Berlin. Likewise, the consequences of increased global demand for the euro would challenge some of the eurozone's core policies.

This paper studies the geography of wealth transfers during the 2008 global financial crisis. We construct valuation changes on bilateral external positions in equity, direct investment and portfolio debt at the height of the crisis to map who benefited and who lost on their external exposure. We find a very diverse set of fortunes governed by the structure of countries' external portfolios. In particular, we are able to relate the gains and losses on debt portfolios to the country's exposure to ABCP conduits and the extent of dollar shortage.

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper discusses two opposing views on global imbalances: The "traditional view", which regards the imbalances as a threat to global economic and financial stability, and the "new paradigm" view, which considers that they are the natural consequence of economic and financial globalization. In terms of their policy implications, the traditional view focuses on monetary and fiscal policy decisions in the United States that need to be urgently reversed to avoid an abrupt unwinding of the imbalances involving a sell-off of dollar assets, a sharp increase in U.S. interest rates, and a hard landing for the global economy. By contrast, the new paradigm view considers that the imbalances will be resolved smoothly through the normal functioning of markets. The paper argues that an abrupt unwinding of imbalances is highly unlikely and advances a number of arguments in support of the new paradigm view.

This paper advances an alternative explanation of the large external imbalance between the United States and China, and its linkages to the current global financial crisis. We show that US current account deficits dated back long before the emergence of China's recent large trade surpluses, with China accounting at its peak for at most one-third of this deficit. The relative rise in China's savings in recent years can be attributed to an increase in its corporate savings, a trend which reflects distortions arising from the transition process from a planned to a market economy.

Today the economic crisis we endure is only the latest chapter in the century-long struggle to restore financial order, the success (or failure) of which is inextricably bound up with American prosperity and the promise of the American way of life.

The Levy Economics Institute Working Paper Collection presents research in progress by Levy Institute scholars and conference participants. The purpose of the series is to disseminate ideas to and elicit comments from academics and professionals. Levy Economics Institute of Bard College, founded in 1986, is a nonprofit, nonpartisan, independently funded research organization devoted to public service. Through scholarship and economic research it generates viable, effective public policy responses to important economic problems that profoundly affect the quality of life in the United States and abroad.

China has long been the world's second largest economy, with the largest foreign exchange reserves and the second largest share in world trade. However, its position in the global economy has long been recognized, but this recognition has not been accompanied by the international monetary significance of the yuan. Despite China's economic significance, the political importance and the voting power in the International Monetary Fund (IMF) cannot be compared to that of the U.S. because the U.S. has over 17% of the votes, whereas China has 3.8 %. Owing to that, the U.S., together with its allies, gets to block decisions and tailor global economic policy. Striving to establish the world's reserve currency, China has been leading comprehensive economic and trade policies while strengthening the yuan convertibility. As a result, effective October 1, 2016, the yuan has become a reserve currency in the basket of special drawing rights along with the dollar, the euro, the yen, and the British pound. China has been supporting the IMF reform while establishing new institutions aimed at redefining the current international policy under the strong influence of the U.S. The paper analyses the channels of Chinese authorities' actions and the prospect of recomposing the international monetary system and reducing the global U.S. influence, with the aim of identifying whether it is likely that the Chinese currency will obtain the status of the world currency.

This paper studies the geography of wealth transfers during the 2008 global financial crisis. We construct valuation changes on bilateral external positions in equity, direct investment and portfolio debt at the height of the crisis to map who benefited and who lost on their external exposure. We find a very diverse set of fortunes governed by the structure of countries' external portfolios. In particular, we are able to relate the gains and losses on debt portfolios to the country's exposure to ABCP conduits and the extent of dollar shortage.

In this article, we explore the demand for the euro for risk management purposes, and the evidence of stock market integration in the euro area. We defi ne a reserve currency as one that investors demand either because it helps them hedge real interest risk and infl ation risk, or because it helps them reduce the volatility of their portfolio of stocks and bonds because its return is negatively correlated with the returns on those assets. This article re-examines the role of the euro as a reserve currency in the sense of Campbell, Viceira and White , updating their evidence, and reviews the evidence of Campbell, Serfaty-de Medeiros and Viceira (2010) in detail. Consistent with the intuition that an integrated capital market is one in which there is a common discount factor pricing securities, we also investigate whether stocks in the euro area have moved from a regime in which national stock markets were priced with discount rates that were predominantly country specifi c, to a regime in which national stock markets are predominantly priced by a euro area-wide common discount rate. We adopt the beta decomposition approach of and Campbell, Polk and Vuolteenaho (2010) to test for capital market integration, and fi nd robust evidence of increased capital market integration in the euro zone, and consequently improved risk sharing among euro zone economies.

Approaching the issue of mounting global imbalances from the perspective of the "Bretton Woods II hypothesis," this paper argues that the popular preoccupation with China's supposed export-led development strategy is misplaced. It also suggests, similar to Japan's depression, subdued growth in Euroland for most of the time since the Maastricht Treaty has been of firstorder importance in these developments. Germany is identified as being at the heart of the European trouble. Globally, there is an ongoing clash between two approches to macroeconomic policy making: a highly dogmatic German approach, and a very pragmatic Anglo-Saxon one. The low levels of interest at which global demand imbalances have been smoothed out financially reflect deficient global demand in an environment of vast supplyside opportunities. After contributing greatly to the build-up of imbalances, Euroland is unlikely to play any constructive part in their unwinding. Hampered by an exchange-rate policy vacuum, a small-country mindset, and soaring intra-area imbalances, Euroland is also illpositioned to cope with fading external growth stimuli.

The introduction of the euro adds an extra dimension to the international financial system, introducing a new currency to rival the dollar as an international and reserve currency.  This chapter examines the pressures that are likely to arise from these developments, and considers the shortcomings of the existing institutional structures for dealing with these pressures. It evaluates the current insti- tutional structures, the International Monetary Fund and the World Bank, which link the European Union to the USA, Japan and the new indus- trialised countries of south-east Asia (NICs). The chapter addresses the question whether these institutions can evolve to cope with the evolution of the euro as a reserve currency, and as an international vehicle for business purposes.