Growing Global Needs for ACU-Denominated Reserve Assets

Abstract

In the wake of the Asian crisis in 1997, policy efforts have been largely devoted to installing various safety devices in the region, e.g. FX reserves and other swap arrangements of CMIM and extra backup with IMF liquidity facilities. Despite comprehensive progresses in regional monetary cooperation, they have proven less than effective in securing financial stability in the region as witnessed by the global financial crisis in 2008. Given the newly raised insurance motives in the region after the GFC, we have been looking for the underlying causes of volatile liquidity situation to seek better ways to enhance regional financial stability. This paper finds that the missing link in previous efforts has been the lack of valid reserve assets. Excess reliance on dollar assets in the form of increased FX reserves has revealed many problems. Going forward, a viable remedy would be a provision of a new reserve asset that represents the growing role of Asia. Introducing a new category of reserve assets in the international monetary system would not only complement the current monetary cooperation in the region but also enhance the global financial stability. This is because of its usefulness to alleviate the excess dollar dominance as a sole reserve currency and its eroding confidence due to tectonic changes in economic landscape. Without addressing the issue, even the best efforts in monetary and financial cooperation would not help ensure stability in the region and the world as repeatedly dictated by the reality. Specifically, introduction of ACU-type of reserve assets would serve to narrow the widening gap between demand and supply of safe financial assets. It would contribute to normalizing cross-border capital flows and sustaining stability of the existing reserve assets. Regional monetary and financial cooperation need to be predicated on this crucial effort to make sustained improvements in global rebalancing and moderate cross-border capital flows for global financial stability. Future efforts in regional monetary cooperation need to take this into account to realize the potential for supplying a new regionally-based reserve asset to remain time-consistent.