The Future International Monetary System: Dominant Currencies or Supranational Money? An Introduction

Abstract

For quite some time the international monetary system has been incapable of deliv-ering external balances or facilitating smooth adjustments of large imbalances. Thereis a convergence of interests for the status quo: the United States is keen to preservethe benefits it receives as the key-currency country, while creditor countries continueto accumulate dollar-denominated assets and sterilize increases in the foreign com-ponent of the monetary base. This special issue of Open Economies Review revisitsthe mechanism of the existing international monetary system and, in the process,highlights what is not working and what could be done to fix it. The planning of theissue took place in 2010, after the subprime financial crisis but before the onset of thesovereign debt crisis. The severity of the latter and the potential that its resolutionmay lead to a break-up of the euro area underscores the fragility of the internationalmonetary system and the urgency to reform it. In what follows I concentrate on threemain issues: competition among international currencies, the deteriorating dollarstandard and Special Drawing Rights, and rules and burden sharing of externaladjustment.1 International CurrenciesNational currencies tend to dominate foreign currencies as means of exchange partlybecause the bulk of transactions is local and partly because governments discriminatein favor of the currency they issue. Currency substitution — the replacement ofdomestic money with a (better) foreign money — is a slow process even when it is