SDRs and SDRs as reserve currency
The Special Drawing Rights (SDR) was created by the International Monetary Fund (IMF) in 1969 to support the Bretton Woods fixed exchange rate system. It was created in response to concerns about the limitations of gold and the U.S. dollars as they were inadequate in supporting the expansion of world trade and financial development. However, SDR is not a currency that can be bought and sold in private markets.
SDRs value is based on a basket of the four principal international currencies reviewed by the Executive Board every five years. The current SDR basket consists of the U.S. dollar, euro, Japanese yen, and pound sterling. There are no notes or coins denominated in SDRs, but the SDR plays a role as an…show more content… dollars and euros. A reserve system largely based on the SDR would have advantages since the IMF could influence aggregate world reserve growth and making it more stable. Moreover, central banks would have less incentive for abrupt shifts between reserve currencies. On the other hand, there are some disadvantages since reserve holders may earn low return and official shifts between reserve currencies could destabilize exchange markets. Nevertheless, these problems might be reduced if countries hold more SDRs and fewer reserve currencies.
After the SDRs allocation, member countries can hold SDRs as part of their international reserves or sell part or all of their SDR allocations. SDRs can be used in operations and transactions involving the IMF. In addition, SDRs can be exchanged for freely usable currencies among themselves and with prescribed…show more content… Consequently, the summit proposed that the IMF issue $250 billion of SDRs to help resist the recession by boosting global liquidity. Although there was a massive increase of SDR compared to the previous issues, the share of SDRs only accounted for approximately 5 percent of the world’s total non-gold reserve stock.
Today, SDRs are not widely used as reserve currency since the exchange rates of almost all significant countries are floating rates and the main reserve asset is the dollar, not the SDRs. The stock of SDRs has never been more than 6 percent of global reserves. SDRs only accounted for small percentages of the world’s total non-gold reserve stock. SDRs could not compete with the role of the U.S. dollar since creditworthy countries flexed their exchange rates and took advantage of growing world capital markets. SDRs were more useful for the less-developed