A more multipolar international monetary system will still involve currency risks for most developing countries
The dollar-based international monetary system of the present and the likely multicurrency system of the future share a number of defects inherent to a system based on national currencies. The fundamental problem is an asymmetric distribution of the costs and benefits of balance of payments adjustment and financing. Countries whose currencies are key in the international monetary system benefit from domestic macroeconomic policy autonomy, seigniorage revenues, relatively low borrowing costs, a competitive edge in financial markets, and little pressure to adjust their external accounts. Meanwhile, countries without key currencies operate within constrained balance of payment positions and bear much of the external adjustment costs of changing global financial and economic conditions. This asymmetric distribution of the cost of adjustment has been a major contributor to the widening of global current account imbalances in recent years. It has also produced a potentially destabilizing situation in which (a) the world's leading economy, the United States, is also the largest debtor, and (b) the world's largest creditor, China, assumes massive currency mismatch risk in the process of financing U.S. debt. Another shortcoming of the current system is that global liquidity is created primarily as the result of the monetary policy decisions that best suit the country issuing the predominant international currency, the United States, rather than with the intention of fully accommodating global demand for liquidity. This characteristic means that the acute dollar shortage that developed in the wake of the Lehman Brothers collapse in 2008, which affected non–U.S. banks particularly hard, was in many respects worse than the dollar shortage of the 1950s.
In a multipolar global economy, it is likely that dissatisfaction with a national currency–based system will deepen. But from a monetary policy perspective, the creation of a system in which global currency decisions are made on a truly multilateral level—that is, with the explicit agreement of a large number of countries—is not likely; as such, a new system would require countries to cede national sovereignty over their monetary policy. The great deal of inertia in the current international monetary system based on national currencies is also a factor, as is the expectation that a more diffuse distribution of global economic power is likely to render cooperation on any sort of economic policy across borders more difficult.
In the years leading up to the financial crisis, the role of international economic policy making was confined to managing the symptoms of incompatible macroeconomic policies, such as exchange rate misalignments and payments imbalances. As capital markets have been liberalized and exchange rates made more flexible, balance of payments constraints on national economies have been considerably eased, shifting policy coordination toward the more politically sensitive spheres of domestic monetary and fiscal policy. Unless a country's borrowing and trade are concentrated in one of the three key currencies, instability in exchange rates between the key currencies will lead to fluctuations in competitiveness and the value of assets and liabilities, impeding that country's economic policy making and potentially jeopardizing the welfare of its residents. Thus, countries without leading currencies will need to step up their efforts to hedge against exchange rate volatility. This will be the case for developing countries, in particular.
Some of the challenges facing the international monetary system could possibly be managed through increased use of the SDR. Established by the IMF in the 1960s as an international reserve asset and unit of account, the SDR is currently valued in terms of a basket of four major international currencies—the euro, Japanese yen, pound sterling, and U.S. dollar. Enhancing the role of the SDR in the international monetary system could help address both the immediate risks to global financial stability and the ongoing costs of currency volatility. From an operational perspective, there are two main ways to increase use of the SDR. The first would be to encourage official borrowing denominated in SDRs. A second avenue would be to formalize central bank currency swap facilities using the SDR, which would be useful during a financial crisis, or perhaps to adjust the composition of the SDR basket to include the renminbi or other major emerging-market currencies. Over time, the SDR could serve as a natural hedge, especially for low income countries that lack developed financial markets