Columbia International Affairs Online: Policy Briefs

CIAO DATE: 05/2010

The Substitution Account as a First Step Toward Reform of the International Monetary System

Peter B. Kenen

March 2010

Peterson Institute for International Economics

Abstract

Today, the international monetary system is based largely on the US dollar, but reserve currency diversification has begun, thanks to the advent of the euro, and it is apt to continue. Eventually, the renminbi could acquire reserve currency status, and the resulting reserve currency diversification could be more disruptive than it has been to date. To forestall that possibility the quasi-currency issued by the International Monetary Fund (IMF), Special Drawing Rights (SDRs), could be made to play a larger role in the international monetary system, precluding potentially disruptive diversification and achieving more orderly growth in the stock of international reserves. This policy brief proposes a way in which that objective could be achieved. It was written in response to a remark made by the Governor of the People's Bank of China, but it harks back to an earlier attempt to establish a so-called substitution account lodged in the IMF into which members of the IMF would deposit some of their substantial dollar reserves in exchange for SDRs.