Tuesday, February 26, 2013

IMF - Reserve Accumulation and International Monetary Stability

INTERNATIONAL MONETARY FUNDReserve Accumulation and International Monetary Stability
Prepared by the Strategy, Policy and Review Department
In collaboration with the Finance, Legal, Monetary and Capital Markets, Research and
Statistics Departments, and consultation with the Area Departments
Approved by Reza Moghadam
April 13, 2010


"Box II.2. The Dollar as a Store of Value: A Summary of Views

There has been a long-running debate speculating on whether the dollar could collapse. Some  commentators have focused on the sustainability of large U.S. current account deficits (e.g.  Krugman, 2007, Obstfeld and Rogoff, 2004), and, particularly in the aftermath of the crisis, fiscal  sustainability or the possibility of inflation (e.g., Ellis, 2009, Buiter, 2009). These concerns are in  addition to long-standing worries on the challenge to long-term fiscal sustainability posed by the  rising costs of healthcare and entitlements. Reinhart and Rogoff (2010) note that historically public  debt levels above 90 percent of GDP have had an adverse impact on growth, and levels exceeding  this threshold in the U.S. are now possible. Chinn and Frankel (2008) argue that a large or sustained  trend depreciation would negatively impact the willingness of central banks to hold dollar reserves,  imperiling the currency’s role as a stable store of value, thereby precipitating the loss of its status as  the premier reserve asset.
Reserve holders’ intentions are unclear. As shown in Box II.1, just a handful of authorities account  for more than half of global reserves, and the bulk of this is in dollar assets. This concentration could  present big holders with a “Catch 22”— trying to switch out of dollar assets if they become  concerned about the currency’s value could precipitate a disorderly adjustment. Chinn and Frankel  (2008) argue the creation of the euro make such a switch possible. Central banks would, however,  face large accounting losses if a run on the dollar materializes, which may deter them from action  that could provoke one. Ultimately, incentives for the private sector holders may present more risks.  With little transparency about official reserve strategies, fears of a change in policy away from the  dollar—whether well-grounded or not—could lead to a run as individual agents and institutions try  and exit before official sales materialize.
 Others point to the dollar’s strengths. This is not the first time fears have been voiced over the  dollar’s future, but instability has to date always been short-lived. As the U.S. holds foreign currency  denominated real and financial assets, but has liabilities in dollars, moderate dollar depreciation  helps to make net external debt more sustainable. Truman (2009, 2010) points out that a large proportion of reserve accumulation has been in currencies other than the dollar, over many years, and this has not led to protracted dollar weakness. Cohen"

A. Symptom of Imperfections in the System

8. Systemic imperfections.
Potential vulnerabilities and market failures in the international monetary and financial system have been important drivers of reserve accumulation, beyond the traditional motives for holding reserves (such as smoothing out the impact on consumption of shocks or ensuring inter-generational equity—e.g., for oil producers). These imperfections include uncertainty about the availability of international liquidity in a financial crisis; large and volatile capital flows; absence of automatic adjustment of global imbalances; and absence of good substitutes to the U.S. dollar as a reserve asset, which also reflects the fact that currency tends to be a natural monopoly. These issues are elaborated below.

Source:
http://www.imf.org/external/np/pp/eng/2010/041310.pdf

Friday, February 22, 2013

ECB - A blueprint for a deep and genuine economic and monetary union

Brussels, 30.11.2012
COM(2012) 777 final/2
Corrigendum
Annule et remplace le document COM(2012) 777 final du 28.11.2012.
COMMUNICATION FROM THE COMMISSION
A blueprint for a deep and genuine economic and monetary union
Launching a European Debate

3.2.3 A redemption fund

"...A clearly reinforced economic and fiscal governance framework could allow addressing the reduction of public debt significantly exceeding the SGP criteria through the setting-up of a redemption fund subject to strict conditionality.

The initial proposal of a European Redemption Fund (ERF) as an immediate crisis tool was developed by the German Council of Economic Experts (GCEE) as part of a euro area-wide debt reduction strategy.

In order to limit moral hazard, and to ensure the stability of the structure as well as the redemption of payments, the GCEE proposed several supervisory and stabilising instruments, such as: (1) strict conditionality, similar to the rules agreed within EFSF/ESM programmes; (2) immediate penalty payments in case of non-compliance with the rules; (3) strict monitoring by a special institution (e.g. Court of Justice of the EU); (4) an immediate stop of debt transfer to the fund during the roll-in phase in case of non-compliance with the rules; (5) pledging of Member States' international reserves (foreign exchange or gold reserves) as a security against their liabilities and/or assignment of (possibly newly introduced) taxes to cover the debt service (e.g. VAT revenues) to limit the liability risk.

The Commission agrees that a strong economic and budgetary framework is a pre-requisite for a workable redemption fund. Increased surveillance and power of intervention in the design and implementation of national fiscal policies would be warranted as discussed in the previous section. The credibility of the adjustment plans would require appropriate fiscal conditions to be set when a Member State enters the system. Strict observance of the adjustment path towards the medium-term objective as proposed by the Commission would represent a minimum in this respect.

A European Redemption Fund under such strict conditionality (see also Annex 3) could thus provide an anchor for a credible reduction in public debt, bringing the level of government indebtedness back below the 60% ceiling as foreseen in the Maastricht Treaty.

The introduction of such a framework could give another signal that euro area Member States are willing, able and committed to reduce their debt levels. This could in turn lower the overall financing costs of over-indebted Member States. By assuring the funding of the reduction of the "excess debt" at sustainable cost, in combination with both incentives and continuous monitoring of its reduction, it could provide euro area Member States with the possibility to gear debt reduction in a manner that could facilitate investment in growthsupporting measures. Furthermore, such a framework could contribute to debt reduction being done on a transparent and coordinated basis across the euro area, thereby complementing the coordination of budgetary policies.

The setting up of such a debt redemption fund could only be envisaged in the context of a revision of the current Treaties. For accountability reasons, the act creating such a fund would need to be framed with great legal precision, as regards the maximum transferrable debt, the maximum time of operation and all other features of the fund, to guarantee the legal certainty required under national constitutional laws.

A possible model ensuring appropriate accountability for a debt redemption fund thus designed would be as follows: a new Treaty legal base would allow the setting up of the fund through a decision of the Council, adopted by unanimity of the euro area members with the consent of the European Parliament, and subject to ratification by Member States under their constitutional requirements. That decision would set up the maximum volume, length and conditions of participation in the fund. A European debt management entity within the Commission, accountable to the European Parliament, would then manage the fund in accordance with the rules set up by the Council decision..."

Source: http://ec.europa.eu/commission_2010-2014/president/news/archives/2012/11/pdf/blueprint_en.pdf

BIS - dollar problem 1951

http://www.bis.org/publ/arpdf/archive/ar1951_en.pdf

Friday, February 8, 2013

GSX - some MPEG Commentary

Source:
http://www.goldensextant.com/commentary10.html
http://www.goldensextant.com/commentary11.html
http://www.goldensextant.com/commentary12.html
http://www.goldensextant.com/commentary13.html
http://www.goldensextant.com/commentary14.html
http://www.goldensextant.com/commentary15.html
http://www.goldensextant.com/commentary16.html

BIS - The Liquidation of Government Debt

BIS Working Papers
No 363
The Liquidation of Government Debt
by Carmen M. Reinhart and M. Belen Sbrancia, Discussion Comments by Ignazio Visco and Alan Taylor
Monetary and Economic Department
November 2011


"... Financial Repression Defined

The pillars of “Financial repression”

The term financial repression was introduced in the literature by the works of Edward Shaw (1973) and Ronald McKinnon (1973). Subsequently, the term became a way of describing emerging market financial systems prior to the widespread financial liberalization that began in the 1980 (see Agenor and Montiel, 2008, for an excellent discussion of the role of inflation and Giovannini and de Melo, 1993 and Easterly, 1989 for country-specific estimates). However, as we document in this paper, financial repression was also the norm for advanced economies during the post-World War II period and in varying degrees up through the 1980s. We describe here some of its main features.

(i) Explicit or indirect caps or ceilings on interest rates, particularly (but not exclusively) those on government debts. These interest rate ceilings could be effected through various means including: (a) explicit government regulation (for instance, Regulation Q in the United States prohibited banks from paying interest on demand deposits and capped interest rates on saving deposits); (b) ceilings on banks’ lending rates, which were a direct subsidy to the government in cases where it borrowed directly from the banks (via loans rather than securitized debt); and (c) interest rate cap in the context of fixed coupon rate nonmarketable debt or (d) maintained through central bank interest rate targets (often at the directive of the Treasury or Ministry of Finance when central bank independence was limited or nonexistent). Allan Meltzer’s (2003) monumental history of the Federal Reserve (Volume I) documents the US experience in this regard; Alex Cukierman’s (1992) classic on central bank independence provides a broader international context.

(ii) Creation and maintenance of a captive domestic audience that facilitated directed credit to the government. This was achieved through multiple layers of regulations from very blunt to more subtle measures. (a) Capital account restrictions and exchange controls orchestrated a “forced home bias” in the portfolio of financial institutions and individuals under the Bretton Woods arrangements. (b) High reserve requirements (usually non-remunerated) as a tax levy on banks (see Brock, 1989, for an insightful international comparison). Among more subtle measures, (c) “prudential” regulatory measures requiring that institutions (almost exclusively domestic ones) hold government debts in their portfolios (pension funds have historically been a primary target). (d) Transaction taxes on equities (see Campbell and Froot, 1994) also act to direct investors toward government (and other) types of debt instruments. And (e) prohibitions on gold transactions.

(iii) Other common measures associated with financial repression aside from the ones discussed above are, (a) direct ownership (e.g., in China or India) of banks or extensive management of banks and other financial institutions (e.g., in Japan) and (b) restricting entry into the financial industry and directing credit to certain industries (see Beim and Calomiris, 2000)..."

...

Episodes of Domestic Debt Conversions, Default or Restructuring,1920s–1950s
 ...
United Kingdom 1932 - Most of the outstanding WWI debt was consolidated into a 3.5 percent perpetual annuity. This domestic debt conversion was apparently voluntary. However, some of the WWI debts to the United States were issued under domestic (UK) law (and therefore classified as domestic debt) and these were defaulted on following the end of the Hoover 1931 moratorium.
...
United States 1933 - Abrogation of the gold clause. In effect, the U.S. refused to pay Panama the annuity in gold due to Panama according to a 1903 treaty. The dispute was settled in 1936 when the US paid the agreed amount in gold balboas..."
...

"The financial repression route taken at the creation of the Bretton Woods system was facilitated by initial conditions after the war, which had left a legacy of pervasive domestic and financial restrictions. Indeed, even before the outbreak of World War II, the pendulum had begun to swing away from laissez-faire financial markets toward heavier-handed regulation in response to the widespread financial crises of 1929-1931. But one cannot help thinking that part of the design principle of the Bretton Woods system was to make it easier to work down massive debt burdens. The legacy of financial crisis made it easier to package those policies as prudential.

To deal with the current debt overhang, similar policies to those documented here may re-emerge in the guise of prudential regulation rather than under the politically incorrect label of financial repression. Moreover, the process where debts are being “placed” at below market interest rates in pension funds and other more captive domestic financial institutions is already under way in several countries in Europe. There are many bankrupt (or nearly so) pension plans at the state level in the United States that bear scrutiny (in addition to the substantive unfunded liabilities at the federal level).

...
While to state that initial conditions on the extent of global integration are vastly different at the outset of Bretton Woods in 1946 and today is an understatement, the direction of regulatory changes have many common features. The incentives to reduce the debt overhang are more compelling today than about half a century ago. After World War II, the overhang was limited to public debt (as the private sector had painfully deleveraged through the 1930s and the war); at present, the debt overhang many advanced economies face encompasses (in varying degrees) households, firms, financial institutions and governments."

Source: http://www.bis.org/publ/work363.pdf

Tuesday, February 5, 2013

BdF - The Banque de France in European and international organisations

The Banque de France in European and international organisations
Marie Debaye
International and European Relations Directorate
International Monetary Relations Division

Source: http://www.banque-france.fr/fileadmin/user_upload/banque_de_france/publications/QSA-21_06.pdf

ECB - RESERVE ACCUMULATION OBJECTIVE OR BY-PRODUCT?

OCCASIONAL PAPER SERIES
NO 73 / SEPTEMBER 2007

RESERVE ACCUMULATION OBJECTIVE OR BY-PRODUCT?

by
J. Onno de Beaufort Wijnholds
and Lars S√łndergaard

 Source: http://www.ecb.de/pub/pdf/scpops/ecbocp73.pdf

ECB - THE ACCUMULATION OF FOREIGN RESERVES

OCCASIONAL PAPER SERIES
NO. 43 / FEBRUARY 2006
THE ACCUMULATION OF
FOREIGN RESERVES
by an International Relations Committee Task Force

Source: http://www.ecb.int/pub/pdf/scpops/ecbocp43.pdf

ECB -  Eurosystem/ESCB Committees

Source: http://www.ecb.int/ecb/educational/facts/orga/html/or_019.en.html

WB - Reform of the International Monetary System A Jagged History and Uncertain Prospects

WPS6070


Policy Research Working Paper                     6070




Reform of the International Monetary System
           A Jagged History and Uncertain Prospects

                                Justin Yifu Lin
                              Shahrokh Fardoust
                               David Rosenblatt




The World Bank
Office of the Chief Economist
Development Economics Vice Presidency
May 2012
Policy Research Working Paper 6070
 
 
 
Box 1: Exorbitant Privilege 


"...The original conception of this term dates back to the idea that the dominant reserve currency country does not have to “earn? foreign exchange to pay for its imports or other obligations – something akin to seigniorage.a In other words, a certain amount of goods or services or assets were acquired simply by exchanging currency that foreigners wished to hold as a reserve asset. In the modern world, reserves are mostly held in government bonds, so exorbitant privilege is a much broader concept to take into consideration the ease (cost) of borrowing overseas and the advantages of being able to do in the country’s own currency.

From a pure seigniorage perspective, one simple measure of the stock – not the flow of benefits—is the estimated $500 billion (about 3.5 percent of GDP) of US currency circulating overseas for which foreigners had to provide “free? goods and services (or assets) to obtain (Eichengreen, 2011a). This represents about half of the $1 trillion in total US dollar currency in circulation. A more contemporary definition – for a world where capital flows are dominating trade flows—is the excess returns to net foreign assets of the reserve currency country. In simpler terms, the status of a reserve currency issuer allows the country to borrow from abroad more cheaply than it lends. In addition, depreciations of the reserve currency improve the net foreign asset position of the reserve currency issuer, unlike developing countries that borrow in foreign currency. This creates the scope for depreciating (similar to inflating) one’s way out of debt on the global scale.

Some Estimates of benefits and costs of reserve currency status for the United States. McKinsey Global Institute (2009) estimates only $10 billion in annual benefits to the US from pure seigniorage, $90 billion in lower borrowing costs, and -$30 to -$60 billion from exchange rate appreciation for a net annual benefit of $40 to $70 billion – or about 0.3 to 0.5 percent of GDP. Studies cited in Eichengreen (2011a, page 118) point to interest rates that could be 50 to 90 basis points lower due to the dollar’s dominant reserve currency status. McKinsey Global Institute (2009) uses an estimate of 50 to 60 basis points for the calculations cited above. Warnock and Warnock (2006) arrived at an estimate of 90 basis points. World Bank (2011, page 126) presents estimates of $15 billion per year in seigniorage (since the early 1990s) and $80 billion annual savings (in recent years) from lower interest costs—fairly close to the McKinsey Global Institute estimates. In brief, the range of estimates for the net annual benefits to the United States– during normal times—of the dollar’s dominance as a reserve currency is in the range of $40 to $150 billion (the latter by nearly doubling the lower borrowing cost estimates if one were to use Warnock and Warnock estimates of the basis point savings). During a regional or global crisis, these net annual benefits could be larger than normal times, since the US dollar-denominated assets often act as “safe-haven,? thus enjoying even relatively lower yields due inflows of capital into US financial markets. In addition, in the aftermath of the global financial crisis, revenues from “pure? seigniorage , which is derived from the increase in real base money associated with increased demand for money due to increased economic activity and other factors, have risen sharply as monetary authorities in reserve currency-issuing countries have substantially increased their balance sheets through quantitative easing and bank support. IMF estimates that these revenues may have reached 8 percent of GDP (Fiscal Monitor, April 2012); however, it is not clear what portion of this burden is born by non-residents.

Other authors use the excess returns on net-foreign assets approach to analyze the benefits (Hausmann and Sturzenegger, 2006, Gourinchas and Rey, 2005, Lane and Milessi-Ferretti, 2007 and 2008, and Habib (2010)). Habib arrives an excess return of 330 basis points, which if applied as “savings? on the current US negative Net Foreign Asset Position of $2.5 trillion (2010), one gets an annual savings of $82 billion..."
...

"...Another approach to measuring international seigniorage would be to look at the growth of US currency in circulation and assume that half ends up in the hands of foreigners: free imports. Since 2000, the total currency in circulation increased by $484 billion. If half was absorbed externally, that would imply cumulative “international? seigniorage of about $240 billion or about $20 billion per year..."

"...Despite gains by the euro, however, the US dollar has remained the dominant international currency. Network externalities are often cited as a reason for the persistence of dominant currencies in the international monetary system. 34 Flandreau and Jobst (2009) cite empirical evidence of strong strategic externalities that help currencies become international on account of their low liquidity premia. Their evidence also strongly supports the hypothesis that economic size and share in international trade and payments play crucial role in determining a country’s role in monetary leadership..."


 ...


"... The transition to a genuine multi-currency reserve system could be gradual as has been the case since the creation of the euro. To a large extent the speed and nature of the transition will depend on the size, structure and speed of change of the global economy. However, historical precedent certainly exists for the rise and fall of reserve currencies. Between 1931 and 1945, the dollar overtook the pound sterling as the dominant reserve currency; however, the final decline of the pound was fairly sudden once a tipping point was reached much later. 38 The policy coordination among the key actors will be essential in determining whether the process of change will be orderly or not. The current situation in some ways resembles that at the end of Bretton Woods I, just before the collapse of the entire system. As mentioned earlier, the system that has evolved since the mid-1970s has been prone to episodic crisis as key players’ macroeconomic policies were not always consistent with what was needed to stabilize the international monetary system and this has resulted in a highly volatile capital flow and exchange rates and interest rates.

         Persistent Payments Imbalances and Volatile Capital Flows. International capital markets virtually disappeared after the widespread debt defaults caused by the Great Depression. Capital movements in the interwar period mainly took the form of hot-money. The disappearance of private capital flows was assumed to be more or less permanent when the design of the World Bank and the IMF was being finalized at the Bretton Woods negotiations in 1944. The size of official assistance and lending soon would be dwarfed by the rapid revival of FDI in the 1950s and the subsequent reemergence of a market in financial capital. 39 Financial flows primarily took the form of floating-interest bank loans rather than the fixed-interest rate bond finance that had been prevalent in the pre-War period. 40 In the following 30 years, there was an explosive growth in bank lending, some of it in the shape of recycling of the so called petro-dollars following the oil price shocks of the 1970s.

38 Eichengreen and Flandreau (2008) date the dollar dominance (as a reserve currency) to the mid-1920s.

International financial integration accelerated after the Asian financial crisis in 1997-98. The gross cross-border flows rose from 5 percent of world GDP in the mid-1990s to around 20 percent by 2007, and international financial openness (external assets plus liabilities) rose sharply from 150 percent to 350 percent of world GDP in the same period. 41 In fact, the gross cross-border flows dwarfed net flows, and they flowed in the opposite direction of what would be implied by countries’ current account deficits and surpluses. For example, for the US the cumulative current account deficits between 2002 and 2007 amounted to $4.8 trillion while it experienced even larger gross outflows, amounting to more than $5.8 trillion- excluding outflows related to financial derivatives. These, however, were financed by around $10 trillion in gross inflows. 42 Financial innovation and development in both advanced countries and emerging economies further accelerated global financial integration. The rising share of cross-border ownership of financial institutions, together with increased funding from international capital markets, further enhanced international financial integration. As a result, the value of external assets and liabilities of banks doubled as a share of GDP from around 30 percent in the early 1990s to about 60 percent in 2007. 43 Rapid growth of world trade also contributed to the increased global financial integration through increased trade credits and export insurance. Nevertheless, international capital flows rose about three times faster than international trade as a result of financial liberalization and innovations, though they fell sharply in 2008 as a result of the economic and financial crisis. Emerging markets participated in this globalization process as they increased their share in international capital markets from 7 percent in 2000 to 17 percent 2007..."

39 By 2011, net flows from official creditors to developing countries amounted to $50 billion (mainly due to increased support during the global crisis) compared to $554 billion in net FDI flows to these countries (Global Economic Prospects, Jan. 2012, World Bank).

40 Williamson (1990) and Obstfeld and Taylor (2004).

41 OECD Economic Outlook, Paris, 2011.

42 These inflows into the US economy were distributed as follows: about $3 trillion in US official assets, including US Treasuries, $1 trillion in FDI, $1.4 trillion in stocks and $1.7 trillion in corporate bonds and $2.6 billion in other assets, including real estate, as reported by US based banks and brokerage firms – source: Economic Report of the Presisent: 2011 Report Spreadsheet tables B-103: http://www.gpoaccess.gov/eop/tables11.html. US Bureau of Economic Analysis, International Investment Position of the United States at Yearend: http://www.bea.gov/international/ai1.htm#BOPIIP

43 BIS Annual Report, Basel, 2010.

"...In the post-crisis period, advanced economies as a group have been running a relatively small deficit on their current account of balance of payments. This aggregate deficit amounted to about $100 billion or about 0.2 percent of their GDP in 2011. However, both this deficit and the current account surplus for developing countries, which amounted to $470 billion (1.9 percent of GDP) in 2011, and mask massive differences among various regions.

 In 2011 , among the developing countries, about 40 percent of the overall surplus in current accounts or $200 billion was accounted for by Asian countries while most other developing countries (with the exception of oil exporters with a surplus of $580 billion) had deficits that were financed by capital inflows and drawing down reserves. The level of international reserves held by emerging and developing economies rose to $6.8 trillion or 67 percent of the total global foreign exchange reserve stock of $10.2 trillion as of end-2011. 47 China alone accounted for about 40 percent of the massive stock of reserves held by emerging and developing economies. However, the changes in reserve holdings were far smaller than the volume of capital flows. For example, in 2007, just before the start of the global crisis, the increase in total holdings of foreign reserves amounted to $1.5 trillion compared to about $8 trillion in capital flows, which were mainly among the advanced countries or originated from them and thus were driven to a large extent by their macroeconomic policy stances.

 Among advanced economies, the US continued to experience a current account deficit of about $470 billion, which in 2011 amounted to 3.1 percent of its GDP. Its expansionary fiscal and monetary policy stance has played an important role in both sustaining the global economic recovery and its large current account deficit. On the other hand, the Euro area, Japan and the rest of advanced countries all had significant surpluses in current account, amounting to about $370 billion in 2011. These very large current account deficits and surpluses are matched by massive net capital flows across borders, which are in turn supported by much larger gross flows, induced to a large extent by the loose monetary stance in the reserve currency countries. According to IMF , the size of the global capital markets (sum of stock market capitalization, bonds, and bank assets) reached $256 trillion in 2010, which was 4 times larger than world GDP. 48 The persistence large deficits and surpluses carry substantial risks as they can cause disorderly adjustment which could lead to large exchange rate movements and cause substantial movements in capital as well as goods and services through their impact on prices. In addition, massive trade imbalances can lead to protectionist policies in deficit countries. According to OECD, about 60 percent of 268 episodes of large foreign capital inflows ended in “sudden stops,�? and about one in ten episodes ended in either a banking or currency crisis.49 This experience provides additional evidence in support of the hypothesis that the major weaknesses in the current international monetary system are harmful to all countries, including developing countries. These problems could become exacerbated in a multiple reserve currency system in the future--particularly if the reserve currency countries fail to closely coordinate their macroeconomic policies (see the following section).

 Globalization and the expansion of the global economy have resulted in a sharp increase in the volume of international transactions. However, these trends, as well as the persistence of large balance of payments imbalances, have brought to light the limitations of the current international monetary system and national policies that were designed for a far less financially integrated world. As we argue below, a well designed international monetary system must have two key functions: (i) it should allow countries to run temporary surpluses and deficits on current account and accumulate net claims, which is a rather mechanical role and has been accomplished by the current system; and (ii) it should have a mechanism-cum-incentives to encourage countries to return to a balanced position. 50 This latter has been the biggest deficiency of the current system..."

...

"...Looking ahead, the international monetary system is likely to face three possible outcomes: (i) continuation of the current “non-system�? international monetary system with continuation of capital flows and exchange rate volatility and its outlook punctuated by regional and global financial crisis from time to time, as has been the case since the 1970s with a distinct possibility of the collapse of the system (a la Bretton Woods I and II); (ii) a more likely scenario with the evolution of the current system into a multi-reserve currency system supported by three major currencies – the dollar, the euro and the renminbi, along with smaller currencies, such as the yen and the Swiss franc, with possibly other large emerging economies (e.g. India and Brazil) joining later, with continued volatility of capital flows and exchange rates, mainly among the major reserve currencies (and with blocks of currencies pegged to each of them) in response to their national policy changes and or unexpected events; and (iii) a collective decision by major global economies to reform the IMS and move toward a new supernational currency a la Keynes’s Bancor. We focus here on the stability of the evolving multiple reserve-currency system in this section, given the relatively higher likelihood we attach to it as a possible medium-term scenario in the absence of a multilateral action to reform the entire system.."
...

"...Despite these somewhat subdued prospects, as discussed earlier in this paper, the dollar still accounts for more than 60 percent of total foreign exchange reserves, for about 40 percent of all international lending and bond issuance, and is involved in more than 80 percent of all foreign exchange transactions. The US economy continues to be the single largest economy in the world, a position that it is likely to retain for at least another decade. Therefore, on balance, unless US policy makers commit serious policy mistakes that could further hurt the country’s economic prospects and its credit rating, the US is likely to continue to remain a key global player with the dollar remaining a key reserve currency for at least another decade, though the US’s weight in the global economy as well as its fiscal and monetary capacity to provide much of the needed liquidity to a growing global economy, or implement counter- cyclical policies at the global level, are likely to continue to erode over time..."

Source: https://openknowledge.worldbank.org/bitstream/handle/10986/9349/WPS6070.txt?sequence=2

Returning to the post:
Past IMS transitions have been marked by instability, and the evolving transition from the current system
dominated by the US dollar to a multi-currency system is not expected to be exempt from such instability.
In the past, instability was associated with the shift from one dominant reserve currency to another
dominant reserve currency. In the future, none of the current and emerging major reserve currencies are
likely to be dominant. The instability/volatility will be related to speculative movements of capital from
one reserve currency country to another--induced partly by the inherent structural weakness of the
reserve-currency countries and partly by the effect of excessive capital inflows and outflows due policy
changes and speculation. In fact, such “musical chair? type of speculative movement has occurred since
the 2008 global crisis, especially after the Euro zone debt crisis. As will be discussed in the section on
stability below, after the US dollar, the euro, the yen, and eventually the renminbi, are expected to
constitute the new multi-currency system. Each of these currencies will be associated with a significant
share of world output and trade, as well as financial flows, and will likely serve as a monetary anchor for
other currencies. Recent experience indicates that frequent shifts among these currencies, caused by
policy shifts and economic news, results in volatility in exchange rates and capital flows that adversely
affect global economic activity.

WB - Determinants of the Physical Demand for Gold : Evidence from Panel Data


URI: http://hdl.handle.net/10986/4960
Date: 2008
Journal: World Economy 31: 416-436
Author(s):  Starr, Martha ;  Tran, Ky

Although the role of gold in the world economy has declined since the gold standard was abandoned, it remains important as a central bank reserve, a hedge against risks, a barometer of geopolitical uncertainty, and an input for jewellery. While portfolio demand for gold has been well studied, determinants of physical demand are less understood. Certain emerging-market countries such as China and India import substantial amounts of gold, with several factors that may contribute: low financial development, need for precautionary savings and/or strong cultural valuation of gold itself. This article uses panel data on gold imports of 21 countries to examine determinants of physical demand. We find that determinants of physical demand differ from those of portfolio demand, and that they differ between the developed and developing worlds.

Source: https://openknowledge.worldbank.org/handle/10986/4960

Friday, February 1, 2013

Frank Veneroso 2007 report

Reserve Management
The Commodity Bubble, The Metals Manipulation, The Contagion Risk To Gold
And The Threat Of The Great Hedge Fund Unwind To Spread Product
To: Global Central Bankers at the World Bank Executive Forum
From: Frank Veneroso
April 17, 2007
Revised as of today July 19, 2007


Source: http://www.venerosoassociates.com/Reserve%20Management%20Parts%20I%20and%20II%20WBP%20Public%2071907.pdf

Updated: http://www.venerosoassociates.com/Part%20I%20II%20Worldbank%20Presentation%205607.pdf