Reforming the Global Reserve System

Abstract

This chapter argues that the present global reserve system (GRS) based on the “fiduciary” or “fiat” US dollar faces several fundamental problems that have been heightened by the Global Financial Crisis of 2008–2009. These include the asymmetric adjustment problem, inequity bias, and the Triffin Dilemma. Policymakers and academics have put forward several proposals to reform the GRS. These are moving to a multi-currency reserve system, strengthening the special drawing rights (SDR)-based GRS managed by the International Monetary Fund (IMF), strengthening the decentralising/multi-layered global financial safety with the IMF and regional financial safety nets, and establishing a new institution to issue a global currency in a fair and equitable manner. While the multi-currency system provides an opportunity for diversification and risk reduction, it does not address the fundamental problems associated with the present GRS. Also establishing a new institution is not politically feasible at the moment as the IMF still exists. The chapter argues that the feasible options in reforming the GRS are, therefore, to pursue incremental reforms in the way that SDRs are, among others, issued and allocated by the IMF and to strengthen the decentralising/multi-layered global financial safety net. These approaches will take time to bear fruit which means that the hegemony of the US dollar will continue for some time.