US Dollar

A Special Moment for Special Drawing Rights

The recent annual meetings of the IMF and the World Bank in Lima, Peru, were dominated by talk of the weakness of several emerging and developing economies. But the discussion focused very little on one key cause: the global monetary system and its continued reliance on the US dollar as the primary reserve currency.

NEW YORK – The recent annual meetings of the International Monetary Fund and the World Bank in Lima, Peru, were dominated by talk of the weakness of several emerging and developing economies. But the discussion focused very little on one key cause: the global monetary system. Much more will be said next month at the IMF board, though what the Fund will do remains an open question.

The problem that emerging and developing economies are facing stems from the fact that their capital inflows follow a strongly pro-cyclical pattern. When they were growing rapidly – especially compared to the advanced economies – they attracted massive amounts of capital. But as risks multiplied, capital started to flow back toward a reserve-issuing country – namely, the United States. After all, the US is set to raise interest rates, and the dollar has appreciated against virtually all of the world’s currencies.

In the past, this pattern has always ultimately led to a correction, with America’s growing current-account deficit eventually bringing about a dollar depreciation. But such corrections – in 1979-1980, 1990-1991, and 2007-2008 – have also always been associated with a global slowdown or crisis.

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