Paper co-authored by Christopher Reim (US), Mariam El Hamiani Khabat (Morocco), Vladimir Olarte Cadavid (Colombia), Deepika Sharma (India), and Bill Papadakis (Greece) from Columbia University for the symposium ‘New World, New Capitalism’ hosted by the French Ministry of Economy, Industry and Employment in Paris, between January 5 and 7 of 2011.
As the “New World, New Capitalism” conference meets for its third time since the beginning of the Global Economic Crisis of 2008, the debate over improved international financial systems has advanced, addressing the systemic risk of high sovereign debt. Persistent unemployment and high levels of public debt in developed countries are juxtaposed with renewed growth and economic vitality in emerging economies, most notably China. This has exposed conflicting policy priorities globally. As Europe makes consolidation its primary goal, the United States (US) is moving ahead with further monetary expansion to solve seemingly intractable unemployment. Asian economies however have managed to avoid immediate effects of the recession and are again accelerating growth. Given this conflict of priorities, the underlying problem of global imbalances only becomes more pronounced, threatening further instability in the years ahead.
As we gather to discuss international cooperation in financial markets, we believe that a discussion on the global reserve system is necessary. In our view, historically high foreign reserve holdings represent various points for market failure going forward: added volatility in currency markets from government intervention; continued global imbalances between trade surplus and trade deficit countries; and an expensive self-insurance mechanism especially for developing countries. For the purposes of this paper, we limit our discussion to the global reserve system, only considering international trade at the margin where it touches reserves. We consider the current model an ad hoc reserve regime, and acknowledge that the world is continuing to move toward a multi-currency system, as reflected in the reduction of the US dollar in total reserve holdings. Further, we consider how a central banking asset may be managed to replace sovereign currency, focusing as a viable option on the Special Drawing Rights (SDRs) currently established by the International Monetary Fund (IMF).
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