The New Politics of International Currencies: Exploring Reluctant Monetary Leaders

1. Comments onReluctant Monetary Leaders?The New Politics of International Currenciesby Eric Helleiner Jae-Ha Park Deputy Dean Asian Development Bank Institute The BRICS & Asia, Currency Internationalization, and International Monetary Reform Hong Kong, 10-11 December 2012

2. Brief Summary of Dr. Helleiner’s Paper • Very interesting, conceptual paper on international currencies (ICs) • Three main points raised • Political factors, not just market-led ones, can affect the extent to which currencies become ICs • The costs and benefits of being an IC are more complex, balanced and less obvious than implied by the phrase exorbitant privilege • Major countries may not want to see their currencies become ICs, leading into a situation of a “leaderless” currency system

3. What is International Currency ? • Unit of Account • Invoicing in international trade or denominate international investments • Medium of Exchange • Settling currency transactions for exports and imports, and capital flows • Store of Value • Currency as assets (private-sector portfolio) • Foreign exchange reserves (official-sector portfolio) • Currently, USD has dominant position among ICs • About 80% of global transactions involve USD • About 60%-70% of global reserve currencies are held in USD

4. Determinants for a Currency to Become an IC • Economic Size and Economic Growth • Country size in terms of GDP, trade volume, credits, etc. • Low transaction costs, or tax rate • Deep, liquid and efficient financial markets • Transparent regulation and property rights • Free Trade • Exports and imports • Free Capital Mobility • FDI; Portfolios; Bank deposits, etc.

5. Difference between IC and Key Currency (KC) ICs vs. KC Many ICs, such as USD, EUR, JPY, GBP, CHF, etc. But currently KC is the USD, and previously the sterling Impact of Political Factors Can influence the degree to which a currency becomes an IC But not obvious that it can influence whether or not an IC becomes a KC Only two recent examples of KCs; USD and sterling Difficult to find some conclusive evidence about what were the critical factors to drive the process US and UK had mature and open economic and financial systems with well-developed financial markets No mention in the paper on what policies UK and US authorities took to promote their currencies as the KCs 5

6. Political Factors: Negative and Positive Negative Factors Hurdles to becoming an IC that could be overcome by relaxing the relevant restrictions No quid pro quo involved Purely domestic decision Positive Factors Various kinds of quid pro quo arrangements Such as bribing trading partners to make greater use of its currency Hard to believe they are very fundamental 6

7. Costs and Benefits: Motives to Use ICs Generally agree with the author’s claim that costs and benefits of ICs, in particular KC, are mixed Paper focuses mostly on reserve holding motives We need to differentiate between fixed and flexible exchange rate systems Bretton Woods System: Fixed ER Holding high level of reserves means a natural feature of buffering process to maintain fixed exchange rates When reserves ran out, need to devalue Current floating exchange rate system Hold reserves if they have substantial foreign currency liabilities or they want to manage exchange rates RMB may be held by foreign countries when they have much RMB-denominated liabilities or they want to peg their exchange rates, etc. 7

8. Leaderless Currency System In a sense, we already have it The US does not do much to actively promote use of USD However, the US is unlikely to do much to de-emphasize the USD’s KC role Therefore, it is reasonable to predict that the USD will work as the KC for some time to come. SDR is not an option to replace USD 8

9. Thank youFor more information: Dr. Jae-Ha PARK Deputy Dean Asian Development Bank Institute jhpark@adbi.org +81 3 3593 5511 www.adbi.org

10. Thank you