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CONSIDERATIONS ON THE ROLE OF THE SDR

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IMF staff regularly produces papers proposing new IMF policies, exploring options for reform, or reviewing existing IMF policies and operations. The following documents have been released and are included in this package:

• A Press Release summarizing the views of the Executive Board as expressed during its
March 30, 2018 consideration of the staff report.

• The Staff Report, prepared by IMF staff and completed on March 6, 2018 for the Executive Board’s consideration on March 30, 2018.
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and
other documents.

Electronic copies of IMF Policy Papers
are available to the public from

http://www.imf.org/external/pp/ppindex.aspx

International Monetary Fund
Washington, D.C.
April 2018
INTERNATIONAL MONETARY FUND 1
CONSIDERATIONS ON THE ROLE OF THE SDR

EXECUTIVE SUMMARY

This paper explores whether a broader role for the SDR could contribute to the smooth functioning and stability of the international monetary system (IMS). Recent staff assessments highlighted that the IMS has displayed considerable resilience. But episodes of stress point also to some weaknesses, including in external adjustment mechanisms; limitations of official liquidity provisions through the Global Financial Safety Net (GFSN); and large-scale reserve accumulation—with systemic side effects.
Those weaknesses, together with the expansion of the SDR basket, have renewed interest in the SDR and motivated a discussion of whether there is an economic rationale for a broader SDR role. The paper looks into how those weaknesses can be mitigated by three concepts of the SDR: the official SDR, the reserve asset administered by the IMF (O-SDR); SDR-denominated financial instruments, or “market SDRs” (MSDR); and the SDR as a unit of account (U-SDR). However, the paper does not propose
specific reform options.

While the O-SDR currently plays a limited role in contributing to the smooth
functioning of the IMS, it could potentially have the greatest scope under a
different legal framework. O-SDR allocations could buffer external adjustment, and
help reduce precautionary reserve accumulation, although the current Articles of
Agreement (AoAs) would need to be revised to address important challenges around
scale, targeting and use of O-SDR allocations. And while O-SDRs could provide a
flexible source of finance to bolster the Fund’s lending capacity, for example to respond
to large-scale events, changes to the allocation mechanism and options to create OSDRs outside of the current allocation process to help address gaps in the Fund’s
lending capacity would again require amendments to the AoAs. The findings are in line
with work conducted in 2011, which concluded that the O-SDR could potentially have a
more promising role in aiding the IMS but faces challenges.
Widespread M-SDR and U-SDR use would likely make more limited contributions
to systemic stability, and face significant implementation challenges.
Diversification properties of the M-SDR and U-SDR could lower valuation changes for
the balance sheets of some borrowers and investors. This may reduce the risks of sharp
external adjustment and potentially reduce precautionary reserve demand. Systemic
benefits of the M-SDR would only come with deep, liquid markets, which may be
difficult to generate. Nevertheless, use of M-SDRs and U-SDRs could be mutually reenforcing, exploiting potential complementarities. A supportive environment based on
March 6, 2018
CONSIDERATIONS ON THE ROLE OF THE SDR
2 INTERNATIONAL MONETARY FUND
official support could help generate network externalities, attracting a sizeable share of
transactions. But the impact of any shift in use could also be limited, for instance, by the
high correspondence between SDR basket weights and the existing share of currencies
in international transactions, and by the ability of many investors to better customize,
compared with the SDR, their currency exposures at low cost.
Economic and technological developments will affect the future shape of the IMS,
and might affect the SDR’s role. The prospect of a more multipolar global economy
could exacerbate uncertainties over how international currency usage will evolve, and
increase systemic risks around international liquidity and its provision. Further work is
needed on how financial technologies (fintech) could impact the IMS and currency
usage. For instance, Distributed Ledger Technologies (DLTs) could boost
interconnectedness and amplify susceptibility to spillovers and capital flow volatility
while influencing the attractiveness of a reserve currency. Such an environment might
call for a re-evaluation of the role of the SDR.
CONSIDERATIONS ON THE ROLE OF THE SDR
INTERNATIONAL MONETARY FUND 3
CONTENTS
I. INTRODUCTION_______________________________________________________________________________ 5
II. THE SDR IN A CHANGING IMS ______________________________________________________________ 6
A. The Role of the SDR Over Time ________________________________________________________________ 6
B. IMS Weaknesses Amid Interconnectedness ___________________________________________________ 10
III. ADDRESSING IMS WEAKNESSES WITH THE SDR _________________________________________19
A. Could the SDR Help Smooth External Adjustment? ___________________________________________ 19
B. Could the SDR Help Fill Gaps in Official Provision of International Liquidity? _________________ 25
C. Could the SDR Help Mitigate the Systemic Side Effects of Reserve Accumulation? ___________ 27
IV. COULD THERE BE COMPLEMENTARITIES FROM USE OF THE SDR IN MULTIPLE
CONCEPTUAL FORMS? _________________________________________________________________________28
V. THE SDR IN THE FUTURE IMS_______________________________________________________________31
A. Uncertain Economic Transitions_______________________________________________________________ 31
B. Cryptocurrencies and Distributed Ledger Technologies _______________________________________ 34
VI. ISSUES FOR DISCUSSION___________________________________________________________________36

1 An external advisory group provided feedback to staff in this assessment. The group was convened by the IMF’s
Economic Counsellor, Maurice Obstfeld, and consists of Claudio Borio, Barry Eichengreen, Yiping Huang, Isabelle
Laurent, José Antonio Ocampo, Hélène Rey, Zoeb Sachee, Catherine Schenk, Edwin Truman, and Beatrice Weder di
Mauro. Views expressed in this paper are not necessarily those of the members of the group or, where applicable,
the institutions with which they are affiliated.

Approved By

Tobias Adrian, Louis Marc
Ducharme, Martin
Mühleisen, Maurice
Obstfeld, and
Andrew Tweedie

Prepared by FIN, MCM, RES, SPR, and STA in consultation with
LEG under the guidance of the SDR Steering Group (Xavier
Debrun, Daniel Hardy, Alfred Kammer, Kristina Kostial, Signe
Krogstrup, Thomas Krueger, Wojciech Maliszewski, Donal
McGettigan, and Carlos Sánchez-Muñoz); led by Alberto Behar
and Andy Swiston (both SPR); with contributions from Rina
Bhattacharya, Joao Jatene, Ceyda Oner, Ezgi Ozturk, JeanGuillaume Poulain, and Sergio Rodriguez-Apolinar (all FIN);
Hoang Pham and Anjum Rosha (both LEG); Abdullah Al-Hassan
and Hui Miao (both MCM); Yuko Hashimoto, Suman Basu, and
Ruy Lama (all RES); Ethan Boswell, Shushanik Hakobyan, Neil
Meads, Camilo Tovar, and Frank Wallace (all SPR); and Paul
Austin, Joji Ishikawa and Raja Hettiarachchi (all STA).1
CONSIDERATIONS ON THE ROLE OF THE SDR
4 INTERNATIONAL MONETARY FUND
BOXES
1. Concepts of the SDR ___________________________________________________________________________ 7
2. Higher Interconnectedness and Rising Spillovers _____________________________________________ 13
3. How Did Countries Use Their 2009 SDR Allocation?___________________________________________ 22
4. How Might Official Sector Support Encourage M-SDR Activity?_______________________________ 30
5. Distributed Ledger Technologies and Cryptocurrencies _______________________________________ 35
FIGURES
1. Strains on the Bretton Woods System__________________________________________________________ 6
2. Transition to Floating Exchange Rates__________________________________________________________ 8
3. Global Holdings of International Reserves _____________________________________________________ 9
4. Financial Openness____________________________________________________________________________ 10
5. Key Characteristics of International Currencies ________________________________________________ 10
6. Exports and Economic Activity ________________________________________________________________ 12
7. Capital Flow Volatility _________________________________________________________________________ 14
8. Exchange Rate Anchors _______________________________________________________________________ 14
9. Elements of the Global Financial Safety Net___________________________________________________ 16
10. Reserve Holders and Instrument Composition _______________________________________________ 17
11. Reserve Flows Relative to Macroeconomic Aggregates of Reserve Currency Issuers _________ 18
12. Schematic Summary of Potential SDR Contributions to IMS _________________________________ 20
13. Foreign Exchange Reserves and IMF Quota Shares __________________________________________ 23
14. Risk and Risk-adjusted Returns ______________________________________________________________ 24
15. Commodity Price Volatility___________________________________________________________________ 25
16. Precautionary and Non-Precautionary Reserves _____________________________________________ 27
17. Impact of Reserve-Related Liabilities on Current Account Balances __________________________ 28
18. Bid-Ask Spreads and Bond Stocks Outstanding______________________________________________ 29
TABLE
1. International Financial Indicators______________________________________________________________ 11
References_______________________________________________________________________________________ 38
CONSIDERATIONS ON THE ROLE OF THE SDR
INTERNATIONAL MONETARY FUND 5
I. INTRODUCTION
1. To date, the SDR’s role in the international monetary system (IMS) has been modest.
The official SDR was conceived under the Bretton Woods gold exchange standard as an official
reserve asset to supplement other sources of reserves. As the IMS evolved, and despite the aims of
the Second Amendment of the Articles of Agreement (AoAs) to make the SDR “the principal reserve
asset in the international monetary system” (AoA XXII), its share in reserves has remained small.
Interest in the SDR as a unit of account and denomination for financial instruments has been
periodic – peaking soon after the collapse of the Bretton Woods par value system – with low overall
uptake.
2. A renewed assessment of the potential contribution of the SDR to a changing IMS is in
order. Discussions based on work published in 2011 did not reach consensus to take forward
possible reforms to the SDR.2 However, a recent stocktaking of the IMS underscored the increasingly
multipolar nature of the global economic and financial system and its rising trade and financial
interconnectedness (IMF, 2016a). A diagnostic of the global financial safety net (GFSN) pointed to
many strengths, but also to weaknesses in the architecture, and enhancing the role of the SDR was
raised as a potential way forward (IMF, 2016b; 2016c; 2017a). The discussion in 2016 on the case for
a general allocation or cancellation of SDRs projected that global demand for reserves would
continue to increase, but refrained from proposing an allocation, pending further work on the SDR’s
function as a source of global liquidity and in meeting the global demand for reserves (IMF, 2016d;
2016e). Renewed interest has also come in the wake of the additional SDR allocations in 2009, from
inclusion of the Chinese renminbi in the SDR valuation basket (IMF, 2015a) and issuance of SDRdenominated financial instruments in China in late 2016.
3. This paper discusses whether a broader role for the SDR could contribute to the
smooth functioning and stability of the current IMS. It updates the evaluation of IMS weaknesses
before discussing how the SDR might be part of the solution, building on discussions in 2011. In this
context, it considers the economic rationale for the O-SDR as a reserve asset, including potentially as
a source of finance for conditional lending with attendant amendments to the AoAs. It also
considers SDR-denominated financial instruments, or “market SDRs”; and the SDR as a unit of
account (Box 1; IMF, 2016f). The emphasis is on the SDR’s potential to aid the IMS rather than on
specific reforms.3 That said, an enhanced role for the SDR cannot substitute for sound policies nor
on its own resolve all IMS weaknesses, but may help alongside other efforts, including global
coordination, stronger surveillance, and an improved GFSN.
4. The paper also introduces a discussion of uncertainties in the IMS of the future. The
global economy is becoming more multipolar, which raises questions about how demand for and
supply of reserve assets will change. Uncertainties about the geography and timing of such shifts are
amplified by potential financial innovations such as distributed ledger technologies (DLTs). This

2 Previous work on the IMS includes IMF (2011a; 2010) and work on the SDR includes IMF (2011b; 2011c).
3 Operational details or discussion of the SDR relative to other mechanisms for addressing IMS weaknesses (e.g.,
financial regulation, capital flow management) lie outside the scope of this paper.
CONSIDERATIONS ON THE ROLE OF THE SDR
6 INTERNATIONAL MONETARY FUND
paper aims to initiate a discussion of how multipolarity and financial innovation may play out and
interact, while acknowledging that these topics deserve further analysis in the future.
5. The paper is structured as follows: Section II describes the role of the SDR in a changing
and challenging IMS. Section III evaluates whether the SDR could address any IMS weaknesses while
outlining relevant hurdles for a broader use of the SDR. Section IV looks into potential
complementarities across the SDR’s conceptual forms. Section V discusses how a more multipolar
world and emerging financial technologies could affect the IMS and the SDR. The final section
suggests issues for discussion.
II. THE SDR IN A CHANGING IMS
6. The SDR, in any of its conceptual forms, is a component of, and operates within, the
IMS. The IMS comprises the set of rules, mechanisms, and supporting institutions that govern
international (current and capital) transactions. It contributes to global economic and financial
stability by supporting adjustment of external imbalances and facilitating provision of international
liquidity while maintaining confidence in the stability of value of the reserve media. This section
reviews the role of the SDR in the IMS and the challenges the IMS faces amid increasing
interconnectedness.
A. The Role of the SDR Over Time
7. The Bretton Woods par value
system of fixed but adjustable exchange
rates and gold convertibility of official U.S.
dollar holdings started showing strains in
the 1960s. Increases in reserves in the 1960s
were accounted for mainly by accumulation
of U.S. short-term official liabilities, with the
sterling declining in influence, and Germany
and Japan resisting the use of their currencies
as reserve assets (Figure 1). U.S. liabilities
came to exceed U.S. gold holdings by 1965,
and there was a growing recognition that, on
prevailing trends, the gold value of official
dollar holdings could be vulnerable to a
potential shift out of these claims (Ocampo, 2016).
8. A tradeoff emerged between sufficient supply of international liquidity in the form of
foreign exchange and confidence in the value of these claims (“Triffin dilemma”). Reserve
distribution under the Bretton Woods system was to a great extent a zero-sum game. With the U.S.
as the dominant reserve supplier, any increase in the collective reserve holdings of the rest of the
world would need to be achieved largely through a decline in the net reserves of—and increase in
monetary liabilities of—the U.S. (Eichengreen and Frankel, 1996). Under the constraints of the
Bretton Woods system, if foreign exchange reserves were not supplied in sufficient quantity to
facilitate rapidly-growing trade and capital flows, a shortage of liquidity could impede global
Figure 1. Strains on the Bretton Woods System
(international reserves, billion SDR)
Sources: IMF, International Financial Statistics; and Haver
Analytics.
Sharp increase in
foreign exchange
Flat gold holdings
Minor role for other reserves
0
20
40
60
80
100
120
1960 1962 1964 1966 1968 1970 1972
Foreign exchange Gold
IMF reserve position
SDR holdings
CONSIDERATIONS ON THE ROLE OF THE SDR
INTERNATIONAL MONETARY FUND 7
economic expansion. Conversely, systemically accommodative U.S. policies would facilitate meeting
reserve demand, but raise risks of a loss in confidence of the value of its liabilities in terms of gold,
undermining the stability of the system by putting pressure on dollar-gold convertibility (Triffin,
1960).
Box 1. Concepts of the SDR
When referring to the SDR, discussion has usually focused on the official SDR (O-SDR). However, there are
multiple SDR-related concepts.
The O-SDR is the reserve asset created in 1969 and defined under the IMF’s Articles of Agreement. It is not a
currency, but a potential claim on the holdings of freely usable currencies of participants in the SDR
Department (currently all IMF members).1 The O-SDR is allocated to participants without regard to a
member’s macroeconomic policies, and can be used unconditionally to obtain freely usable currency to
meet a balance of payments need. Under the current framework, allocations are made in proportion to IMF
quotas to meet the long-term global need to supplement existing reserves (IMF, 2016d).2 Transactions and
holdings are limited to participants, the General Resources Account of the IMF (as a result of transactions
between participants and the IMF), and prescribed holders.3
Since 1974 the O-SDR has been valued based on a basket of currencies, after originally having a value
defined in terms of gold. In 2015, in the most recent quinquennial review of the SDR valuation method, the
Chinese renminbi was determined by the Executive Board to meet the criteria4
for inclusion in the valuation
basket, and was included effective October 1, 2016 (IMF, 2015a) alongside the euro, Japanese yen, pound
sterling, and U.S. dollar. A new weighting formula was adopted that increases the share and coverage of
variables reflecting the use of currencies in international transactions.5
An M-SDR is a financial instrument issued by an official or private entity denominated in SDR. All other
parameters such as interest rate or maturity are defined by agreement between the parties. For example, MSDRs could include bank deposits, loans, securities, or derivatives.
Use of the SDR as a unit of account, for example to price international trade or for the dissemination of
statistics, is referred to as the U-SDR.
1/A freely usable currency is one that the Fund has determined (i) is, in fact, widely used to make payments for
international transactions, and (ii) is widely traded in the principal exchange markets (AoA XXX(f)).
2/Allocations or cancellations of O-SDRs require a proposal of the Managing Director, concurred by the Executive Board,
and approved by an eighty-five percent majority of the total voting power of the Board of Governors (AoA XVIII,
Section 4).
3/Some international financial institutions and regional central banks are prescribed holders, who do not receive
allocations but are permitted to hold O-SDRs, pursuant to approval by an eighty-five percent majority of the total voting
power of the Executive Board (AoA XVII, Section 3).
4/Specifically, the renminbi was determined to be one of the five currencies that are 1) issued by IMF members (or
monetary unions), which are the largest exporters of goods and services in the past 5 years; and 2) determined by the
Fund to be freely usable.
5/The O-SDR carries an interest rate determined by three-month interest rates on government debt instruments of the
currencies in the valuation basket. The O-SDR mechanism is self-financing and levies charges on allocations, which are
then used to pay interest on O-SDR holdings.
9. The O-SDR was expected to lower systemic vulnerabilities by increasing reserves while
reducing accumulation of short-term official claims on the U.S. The aim in creating the O-SDR
was “to meet the long-term global need…to supplement existing reserve assets…” (AoA XVIII,
CONSIDERATIONS ON THE ROLE OF THE SDR
8 INTERNATIONAL MONETARY FUND
Section 1; IMF, 1968). Its value was fixed in terms of gold, yet it paid interest, a combination that was
expected to make it an attractive reserve asset. The ability to use it without restriction to meet
balance of payments (BOP) needs also aimed at ensuring its attractiveness, and allowed it to
facilitate the reallocation of the existing pool of reserve assets.4 Given that the O-SDR did not
represent the liability of any single issuer, O-SDR allocations were expected to reduce overall
demand for dollar-denominated claims, which would permit U.S. BOP adjustment without reserve
losses in other countries (Hirsch, 1971).
10. The first general O-SDR
allocation took place as the IMS was
changing dramatically. In 1967, the
Board agreed to introduce the SDR to
supplement existing reserve assets and
an allocation of SDR 9.3 billion took
place in 1970-72 (Garritsen de Vries,
1976). The Bretton Woods par value
system collapsed in the early 1970s.
Convertibility of official U.S. dollar
holdings into gold at a fixed price
ended in 1971 and major economies
moved to a system of flexible exchange
rates – albeit reluctantly and on the
understanding that it would be
temporary (Ocampo, 2016). There was
also widespread easing of restrictions on capital flows, at first mainly among advanced economies
(AEs) and broadening to emerging market and developing economies (EMDEs) in recent decades.
This, combined with the development of international capital markets, meant that international
liquidity and official liquidity were no longer synonymous, weakening the link between BOP
developments in reserve currency issuers and the supply of international liquidity (Bini Smaghi,
2011). In sum, the system in general—and the supply of reserves in particular—became more
flexible.
11. In the wake of these changes, the O-SDR played only a minor role in the IMS. In the
1970s, the absence of a gold standard, concerns over the dollar due to exchange rate volatility and
high inflation prompted interest in the O-SDR (Figure 2). Reforms, including valuation according to a
basket of currencies (Box 1), also made the O-SDR a more attractive and stable alternative to claims
in national currencies. The second amendment to the AoAs sought to formalize the SDR as the
“principal reserve asset of the international monetary system” (AoA XXII; Boughton, 2001), and

4 An IMF member participating in the SDR Department can use its O-SDR to exchange with another participant for
freely usable currencies, either by agreement or through the IMF’s designation of such another participant. In the
latter case, the member is “expected” to use its O-SDR only if the member has a BOP need. The IMF would not
challenge the member on the existence of such need, but if the member persists in failing to fulfill this expectation,
the IMF may suspend the member’s right to use O-SDR. See AoA XIX, Section 3.
Figure 2. Transition to Floating Exchange Rates
Sources: IMF, International Financial Statistics; Haver Analytics;
and IMF staff calculations.
1/ Volatility is measured as the rolling three-year standard
deviation of the monthly percent change against the U.S. dollar
for the median of the G10 currencies.
CONSIDERATIONS ON THE ROLE OF THE SDR
INTERNATIONAL MONETARY FUND 9
interest culminated in the second general allocation of SDR 12.1 billion in 1979-1981.5
Counterbalancing this interest in the O-SDR was the view that the evolving IMS could now provide
sufficient liquidity through official swaps, official borrowing, and private capital markets, reducing
the original rationale for the O-SDR. Furthermore, the unconditional nature of the O-SDR began to
raise concerns that it could be used by members to avoid necessary policy adjustment, especially
outside the constraints of the Bretton Woods par value system. There was thus a lack of consensus
about the SDR’s intended purpose in the IMS, limiting support for O-SDR allocations after 1981 and
other proposals for the SDR to play a broader role. The SDR’s share in global reserves gradually
diminished.
12. During the global financial crisis (GFC), a
new O-SDR allocation was used to supplement
reserves. The largest allocation to date,
SDR 161.2 billion (equivalent to about
US$250 billion, or about 3 percent of global
reserves at the time), was made effective in August
2009 (Box 3).
6
It was argued that long-run reserve
demand would substantially increase in the
aftermath of the GFC. In the context of depressed
global economic conditions and deflationary risks,
the allocation would help meet this demand in a
manner more conducive to systemic stability than
policies geared toward additional reserve
accumulation (IMF, 2009a). And it would help
smooth adjustment at the individual country level in the face of a short-term financing shock (IMF,
2009b). The allocation increased reserves substantially for many?estimated at around 19 percent
for low-income countries and over 7 percent for emerging markets (excluding China and fuel
exporters)—even though overall O-SDR holdings remained small relative to the total stock of
reserves (Figure 3). Markets reacted favorably to the allocation, which formed part of the broader
G20 crisis response (including tripling the IMF’s lending capacity and revamping the IMF’s lending
facilities) that helped to reduce systemic vulnerabilities.
13. There has also been periodic interest in the U-SDR and M-SDR. With the demise of the
gold standard, the U-SDR was adopted as a unit of account by several international organizations
and became an exchange rate anchor for some 15 countries. It has also been used for some
international commercial transactions such as transit fees for the Suez Canal. M-SDR development

5 Other roles for the SDR considered at the time were as an anchor in a return to a par value system and as a
mechanism for countries to diversify their reserve holdings without disrupting markets by creating an account to
substitute SDRs for official holdings of gold or foreign exchange (substitution account; see Garritsen de Vries, 1985a;
1985b).
6
In September 2009, a special allocation of SDR 21.5 billion was made, subsequent to the entry into force of the
Fourth Amendment to the AoAs (after initial approval in 1997). This allocation was made to allow members to
participate equitably in the SDR, even if they joined the IMF after 1981 and thus had not participated in the previous
allocations.
Figure 3. Global Holdings of International
Reserves
(trillion SDR)
Source: IMF, International Financial Statistics.
0
1
2
3
4
5
6
7
8
9
10
1990 1995 2000 2005 2010 2015
Gold at market price
SDR holdings
Reserve position in Fund
Foreign exchange
Total reserves
CONSIDERATIONS ON THE ROLE OF THE SDR
10 INTERNATIONAL MONETARY FUND
reflected ready-made diversification benefits in an environment of U.S. dollar weakness and an
expectation that the SDR would play a greater role in the IMS. SDR-denominated instruments issued
by private and public entities comprised commercial bank deposits, syndicated credits, certificates of
deposit, Eurobonds, and floating-rate instruments, while demand deposit accounts offered
transactions directly in SDR (Hoguet and Tadesse, 2011). However, subsequent U.S. dollar strength
and development of alternative diversification options suppressed interest in a broader use of the
U-SDR and M-SDR. Moreover, use of the SDR as an exchange rate anchor has fallen to three
countries (IMF, 2016f).
7 Only more recently has there been renewed interest following M-SDR bond
issuances in China.
B. IMS Weaknesses Amid Interconnectedness
14. The IMS has evolved, but continues to face challenges. The current IMS has underpinned
interconnectedness, which has contributed to income growth and a large decline in world poverty.
Relative to the Bretton Woods system, there has been greater flexibility in responding to shocks and
crises. Nevertheless, as set out in staff’s recent stocktaking of the IMS (IMF, 2016a) and described
below, increased interconnectedness amplifies the effects of financial frictions on the functioning of
the IMS and can complicate macroeconomic management. These expose weaknesses in the IMS:
large spillovers and volatility in capital flows are exacerbating weaknesses in external adjustment,
underscoring the limitations of official liquidity provision through the GFSN, and driving large-scale
reserve accumulation with systemic side effects.

7 The case of the European Currency Unit (ECU) provides an instructive contrast, as a wide range of ECU markets
developed, supported by expectations of eventual European monetary unification (Allen, 1990).
Figure 4. Financial Openness
(gross external assets plus liabilities, in
percent of GDP, median of country group)
Figure 5. Key Characteristics of International
Currencies1/
Sources: Updated data based on Lane and MilesiFerretti (2007); and IMF staff calculations.
Sources: S&P Global; Bank for International Settlements;
IMF, International Financial Statistics; IMF, World Economic
Outlook; and IMF staff calculations.
1/ Includes issuers with S&P credit rating of A- or above and
2016 GDP at market exchange rates greater than
SDR 300 billion (bubbles are sized by GDP). Liquid liabilities
include central government debt and monetary base.
CONSIDERATIONS ON THE ROLE OF THE SDR
INTERNATIONAL MONETARY FUND 11
15. The IMS operates in a complex interconnected economic and financial environment.
From 1990 through 2015, as countries integrated rapidly through trade, exports of AEs increased
from 18 to 30 percent of GDP and exports of EMDEs rose from 12 to 26 percent of GDP. At the same
time, the global trade network has become more integrated and complex, with some EMDEs
becoming hubs. International financial integration also increased dramatically, both in terms of the
size of cross-border positions (Figure 4) and the number of large connections. However, financial
integration was slower in EMDEs, leaving a substantial gap relative to AEs that, if narrowed with
convergence, could amplify capital flow volatility (IMF, 2016a; 2016b).
16. Economic developments in currency issuers can play an outsize role. National
currencies—most prominently, the U.S. dollar and the euro—play international roles as means of
payment and unit of account (Table 1), and “safe assets” denominated in these currencies provide
stores of value and ready access to international liquidity. These global roles are determined by
fundamentals (economic size of the issuer, depth and liquidity of financial markets, credibility of
domestic macroeconomic policies, and broader institutional strength), network externalities, and
habit formation (Figure 5). The resulting concentration of trade and financial transactions in a few
currencies creates the potential for economic developments in those currency issuers to be much
more important than their direct weight in international commerce.8
17. As financial integration increases, frictions become more challenging. In a financiallyintegrated world, capital flows can intensify macroeconomic volatility through boom-bust cycles,
especially given their tendency to be more procyclical than domestic credit (Borio and others, 2011;
Lane and McQuade, 2014). Sharp reversals in capital flows have been associated with feedback loops

8 See Eichengreen (2011), Prasad (2014), Aizenman (2013), Obstfeld and others (2010), and Goldberg and Tille (2009).
Table 1. International Financial Indicators
(shares in percent of global total)
Sources: IMF staff calculations based on data from Bank for International Settlements, and IMF Currency
Composition of Official Foreign Exchange Reserves survey.
1/ As of October 27, 2017. Actual currency weights in the SDR basket may change on a daily basis due to exchange
rate movements.
2/ RMB ranked 8th in foreign exchange market turnover, 5th in international banking liabilities outstanding, 10th in
international debt securities outstanding, and 7th in official foreign exchange reserves.
Foreign
Exchange
Market
Turnover
Cross-Border
Payments
International
Banking Liabilities
International
Debt Securities
Official Foreign
Exchange
Reserves
SDR Basket
Weights 1/
2016: April 2014:Q3–2015:Q2 2016: Q4 2016: Q4 2017: Q2 Percent
USD 43.8 42.7 54.8 46.6 63.8 41.55
EUR 15.6 35.4 25.2 37.5 19.9 32.07
GBP 6.4 4.1 4.6 8.0 4.4 8.03
JPY 10.8 3.4 3.1 1.9 4.6 7.44
RMB 2/ 2.0 1.1 1.0 0.4 1.1 10.91
Other 21.4 13.2 11.2 5.6 6.2 n.a.
CONSIDERATIONS ON THE ROLE OF THE SDR
12 INTERNATIONAL MONETARY FUND
of financial system distress, forced asset sales and pullbacks in lending, output losses, and further
deterioration in balance sheets (Calvo and others, 2008). Herding and contagion effects can
exacerbate these episodes (Agosin and Huaita, 2012; Forbes and Warnock, 2012).
18. Cross-border spillovers have been increasing.
9 Empirical studies confirm that higher
interconnectedness has increased economic spillovers (Box 2). Rising trade ratios have bound
countries’ economic fortunes more tightly, as illustrated by the increasing correlation between
fluctuations in GDP and export growth rates (Figure 6). Similarly, the magnitude of capital flow
swings has increased (Figure 7; IMF, 2016g). Asset prices have become more correlated across
countries. Financial integration transmits financial conditions across borders, even under flexible
exchange rates, which offer only partial insulation of countries’ monetary policies from global cycles
(Obstfeld and others, 2018; Rey, 2015). In particular, conditions in the issuers of international reserve
currencies have a sizable impact on domestic financial conditions across a wide range of countries.
In EMDEs, transmission is larger and especially sensitive to the degree of financial integration
(Miranda-Agrippino and Rey, 2015; IMF, 2017b).
Figure 6. Exports and Economic Activity
(10-year rolling correlations of real export growth with real GDP or real domestic demand growth,
median by country group)
Real exports and real GDP Real exports and real domestic demand
Sources: IMF, World Economic Outlook; and IMF staff calculations.

9 Spillovers are defined here as the transmission of economic and financial conditions from one economy to another,
whether due to the influence of economic linkages or increased exposure to contagion.
0.0
0.2
0.4
0.6
0.8
1.0
1990 1994 1998 2002 2006 2010 2014
All Advanced economies
Emerging markets Developing markets
-0.2
0.0
0.2
0.4
0.6
0.8
1990 1994 1998 2002 2006 2010 2014
All Advanced economies Emerging markets Developing markets
CONSIDERATIONS ON THE ROLE OF THE SDR
INTERNATIONAL MONETARY FUND 13
Box 2. Higher Interconnectedness and Rising Spillovers
Macroeconomic theory gives ambiguous predictions about the effects of interconnectedness on the
transmission of economic and financial conditions across countries. However, the empirical literature generally
finds that higher linkages raise spillovers through several channels, with financial spillovers tending to be
episodic.
Studies have documented a connection between higher trade integration and a larger impact of
external factors on the domestic economy. Studies measuring bilateral trade linkages using gross trade
reached mixed conclusions, but empirical work focusing on value-added trade finds that higher trade
linkages have a significant impact on business cycle synchronization and transmission of country-specific
shocks (Duval and others, 2016). There is also evidence that broader trade openness increases exposure to
global financial shocks by making domestic financial conditions more sensitive to global ones (IMF, 2017b).
This was evident during the GFC, as countries with higher ratios of trade-to-GDP experienced a larger impact
on economic activity relative to pre-crisis forecasts (Berkmen and others, 2012).
A number of channels have been identified by which higher financial interconnectedness transmits
financial conditions across borders. There is a direct channel via interest rates, as more financially open
economies have been shown to have a higher co-movement of domestic interest rates with both policy and
long-term rates in reserve currency issuers (Aizenman and others, 2016). There are links between shocks in
reserve currency issuers and cross-border capital flows, implying countries with larger cross-border positions
are more exposed to potential spillovers. Cetorelli and Goldberg (2011) establish that this impact can occur
through cross-border bank lending, local lending of foreign bank affiliates, or effects on the credit supply of
domestic banks that rely on cross-border interbank funding, while Sahay and others (2014) document similar
spillovers through portfolio flows. Finally, a risk-taking channel has been identified, by which changes in risk
aversion in global markets spill over into returns of risky assets around the world, including via capital flows
(Ahmed and Zlate, 2014).
Rising financial interconnectedness seems to result in spillovers that are more episodic in nature. The
effects of higher financial integration on business cycle synchronization in normal times are mixed, with
studies finding effects in either direction (Imbs, 2006; Kalemli-Ozcan and others, 2013a), and evidence
suggesting no upward trend in the share of fluctuations in domestic output or financial conditions
accounted for by global financial shocks—when excluding the GFC (Abbate and others, 2016; IMF, 2017b).
However, the impact of the GFC on output was higher for countries with higher bilateral U.S. financial
linkages, as well as for those with higher overall financial integration (Kalemli-Ozcan and others, 2013b;
Imbs, 2010). This presents an overall picture of financial spillovers that are episodic in nature and potentially
non-linear, consistent with swings in risk aversion playing a prominent role in their transmission (HausmanGuil and others, 2016).
CONSIDERATIONS ON THE ROLE OF THE SDR
14 INTERNATIONAL MONETARY FUND
Figure 7. Capital Flow Volatility
(change in gross flows, percent of GDP, 10-year rolling standard deviation, median by
country group)
Liabilities Assets
Sources: IMF, World Economic Outlook; and IMF staff calculations.
19. Macroeconomic management has become more complicated by tradeoffs among
currency stability, independent monetary policy, capital mobility, and financial stability.
Countries accounting for a significant proportion of the global economy still anchor their currencies
(Figure 8; Ilzetzki and others, 2017).10 In spite of this, many still pursue independent monetary policy,
requiring an augmented policy toolkit with capital flow management or macroprudential measures

10 Tovar and Mohd Nor (2018) refer to a currency as anchored when it is pegged to a reserve (anchor) currency or if
changes in the currency’s value are mainly explained by the factors that change the value of the reserve (anchor)
currency.
Figure 8. Exchange Rate Anchors
(share in global GDP-PPP)
Historical metrics1/
Adjusted metrics2/
Sources: Tovar and Mohd Nor (2018); and IMF staff calculations.
1/ The Deutsche Mark and French Franc are grouped into a single reserve currency prior to the introduction of the
euro. The methodology does not treat the Chinese renminbi (RMB) as a reserve currency.
2/ The methodology employed addresses collinearity problems between the U.S. dollar and RMB, which allows one
to measure the influence and size of the RMB currency bloc.
2
4
6
8
10
12
14
1990 1995 2000 2005 2010 2015
All
Advanced economies
Emerging markets Developing markets
0
2
4
6
8
10
12
1990 1995 2000 2005 2010 2015
All
Advanced economies
Emerging markets Developing markets
CONSIDERATIONS ON THE ROLE OF THE SDR
INTERNATIONAL MONETARY FUND 15
(IMF, 2015b). The coordination among instruments and interaction between their effects can add to
complexity and may generate unintended consequences for other countries.11 Countries with flexible
exchange rates, in particular those with large cross-border liabilities, have increasingly faced
tradeoffs between financial stability and currency flexibility, giving rise to an increased need for
domestic lending of last resort operations in foreign currency for central banks during episodes of
disorderly market conditions (Obstfeld, 2013; Borio and others, 2014). An example of this was the
foreign currency funding stress in AEs during the height of the GFC, which resulted in a new set of
central bank foreign currency swap arrangements in some AEs (Obstfeld, 2013).12
20. Increased interconnectedness helped expose weaknesses of the IMS. Of these, there are
three that the SDR might help address: (a) weak external adjustment mechanisms, (b) limitations of
official liquidity provision through the GFSN, and (c) large-scale reserve accumulation with systemic
side effects. The weaknesses discussed in the rest of this section lay the foundation for examination
of how a broader role for the SDR could improve the functioning of the IMS in Section III.
21. Despite a system of flexible exchange rates, external adjustment has been challenging.
After the GFC, real exchange rate adjustments played a limited role in reducing current account
imbalances, because imbalances and subsequent exchange rate movements were only loosely
related. Moreover, those currency movements generated weak trade volume and growth responses
(IMF, 2014). Some factors may be contributing to a longer-term weakening of adjustment
mechanisms:
• Capital flow volatility has resulted at times in sharp and sudden adjustments in exchange rates,
which have tended to be contractionary since the effects of a depreciation on domestic demand
have exceeded any expansionary trade effects (IMF, 2016a).
13 Since such episodes often (but not
always) occur amid large current account deficits, and since countries with surpluses do not face
such pressures, this underscores the asymmetric adjustment problem that has been identified as
a long-standing feature of the IMS (Ocampo, 2014).
• Changes in the structure of trade: Trade pricing in a small number of dominant currencies can
inhibit external adjustment due to an asymmetric short-run response of trade flows to exchange
rate movements (Gopinath, 2015; Casas and others, 2016).14 Specifically, with dominant currency
pricing, a depreciation against the dominant currency may reduce real imports but has no
impact on real exports. Thus, the use of a dominant currency for trade invoicing can lead to a

11 See Dooley and others (2003); Gagnon (2013); Bayoumi and others (2015); Ghosh and others (2017).
12 While the central banks in AEs could institutionalize bilateral swap lines to meet potential needs for foreign
currency, EMDEs with flexible exchange rates do not have such assured sources of foreign exchange liquidity, and are
likely to hold foreign reserves independently of other motives such as exchange rate management.
13 Large devaluations can also increase real income inequality because poorer households spend a larger portion of
their income on tradable goods (Cravino and Levchenko, 2017).
14 For countries that invoice a large portion of their exports and imports in U.S. dollars, depreciation of their own
currency would not make their exports more competitive and would make their imports more expensive. On the
other hand, a dollar depreciation will make most U.S. exports cheaper given that most of its exports are invoiced in
dollars. Consequently, in a world with dominant pricing in U.S. dollars, trade balance adjustments primarily happen
through U.S. exports and rest-of-the-world imports.
CONSIDERATIONS ON THE ROLE OF THE SDR
16 INTERNATIONAL MONETARY FUND
more muted external adjustment in response to exchange rate movements. This can be
exacerbated by the rising share in global trade of EMDEs, which use the dollar more widely in
pricing.
15 Also, the relationship between real exchange rate adjustment and trade flows may
have been weakened by the build-up of global value chains.
16
22. There are limitations in the official
provision of international liquidity. The
official GFSN, which includes bilateral swap lines,
regional financing arrangements, and IMF
resources, has been armed with increased
resources and new instruments since the GFC
(Figure 9). However, access is unpredictable,
coverage is uneven, coordination among layers
is underdeveloped and often untested; for many
borrowers, political costs in accessing some
elements are high (IMF, 2016b; 2016c; 2016h).
23. Self-insurance through reserve
accumulation has been a central policy
response. Increased interconnectedness and
volatility raise the importance of countries
following sound policies, but also the costs of
changes in market sentiment. As such, many
countries self-insure by accumulating large
foreign exchange reserves. Reserve holdings—
mostly in the form of liabilities (mainly sovereign
securities) of residents of the main international
currency issuers—remain the primary liquidity
buffer for most countries and have increased substantially since the late 1990s (Figure 9) across
most EMDEs and a few AEs (Figure 10).
17 Empirical analysis of reserve demand confirms that
precautionary motives have played an important role, as accumulations have been associated with
the size of cross-border liabilities, past occurrence of crises, as well as exchange rate regimes
(Obstfeld and others, 2010; Obstfeld, 2013; Ghosh and others, 2014). Wider private demand for
reserve assets can add to official sector demand, particularly when the safety of other assets is
questioned (Caballero and Farhi, 2014).

15 Data suggest that the dollar is used to invoice at least 40 percent of global trade not involving the U.S. and is even
more prominent in developing Asia and Latin America. The euro is more commonly used in trade involving the
European Union (Ito and Chinn, 2015; Goldberg and Tille, 2008). Dollar pricing is a factor in limited trade responses
to exchange rates among oil exporters (Behar and Fouejieu, 2017).
16 Ahmed and others (2017) and Cheng and others (2016) find evidence for this effect, while Leigh and others (2017)
find stability in the relationship between exchange rates and trade volumes.
17 Foreign exchange reserves play a minor role in a number of large AEs with flexible exchange rates (see also
Figure 13 below).
Figure 9. Elements of the Global Financial Safety Net
(percent of world GDP)
Sources: National central banks; IMF, International Financial
Statistics; and IMF staff estimates.
1/ Unlimited swap arrangements are estimated based on known
past usage or, if undrawn, on average past maximum drawings of
the remaining central bank members in the network. Two-way
arrangements are only counted once.
2/ Limited-value swap lines include all arrangements with an
explicit value limit and exclude all CMIM and NAFA
arrangements, which are included under RFAs. Two-way
arrangements are only counted once.
3/ Based on explicit lending capacity/limit where available,
committed resources, or estimated lending capacity based on
country access limits and paid-in capital.
CONSIDERATIONS ON THE ROLE OF THE SDR
INTERNATIONAL MONETARY FUND 17
Figure 10. Reserve Holders and Instrument Composition
Foreign exchange reserves have increased
significantly, to 16 percent of world GDP…
…with a large shift to higher holdings among emerging
and developing economies…

…and a few advanced economies. Reserves are comprised principally of securities…
…primarily denominated in the U.S. dollar, followed
by the euro…
…and issued in large part by residents of those two
economies.
Sources: BIS; Haver Analytics; IRFCL; MBFS; IMF, COFER survey; IMF, International Financial Statistics; IMF, SEFER;
IMF, World Economic Outlook; and IMF staff calculations.
0
5
10
15
20
25
30
35
40
1990 1995 2000 2005 2010 2015
World
Advanced economies
(OECD as of 1990) Other economies
International Reserves
(percent of GDP of country group)
0
20
40
60
80
100
1999 2001 2003 2005 2007 2009 2011 2013 2015
U.S. dollar Euro Pound sterling Japanese yen All other
Currency Composition of Reserves
(percent of identified foreign exchange reserves)
CONSIDERATIONS ON THE ROLE OF THE SDR
18 INTERNATIONAL MONETARY FUND
24. Reserve holdings may enhance systemic resilience and allow countries to smooth
adjustment. Foreign exchange reserves can be used by holders to smooth disruptive external
adjustment and allow central banks to conduct domestic lending of last resort operations in foreign
currency to preserve financial stability. Sufficient levels of reserves available for such purposes, even
without their active use, can strengthen confidence and reduce the probability of self-fulfilling crises,
which, among other factors, could explain the modest usage by large reserve holders. In turn, this
reduces spillovers faced by others and contributes to enhanced systemic stability (Llaudes and
others, 2010; IMF, 2011d; Gourinchas and Obstfeld, 2012).
25. But excessively large reserve accumulation
can have negative systemic side effects such as
larger external imbalances and balance sheet risks,
inefficient consumption and investment, and
distorted interest rates.18 Figure 11 provides some
indicative benchmarks on the macroeconomic scale
of reserve flows for reserve currency issuers in recent
decades, suggesting potentially significant
macroeconomic effects, particularly in the U.S.
Reserve-related flows could generate a number of
effects both in reserve currency issuers and countries
engaging in large-scale reserve accumulation:19
• External imbalances: Several studies show that
reserve-related liabilities generate larger current
account deficits for reserve currency issuers and
that reserve accumulation raises the current
account of the accumulating country (for example, Gagnon, 2013). Empirical estimates from the
IMF’s EBA model also find an association between a currency’s share in international reserves
and a currency issuer’s current account deficit (given the multilateral constraint on current
account balances, the current account deficits of reserve currency issuers are mirrored by
surpluses of the same magnitude in reserve holders). Although the direction of causation is
debated (Obstfeld, 2017), this suggests that lower and more diversified reserve-related flows
could lessen the pressure toward current account deficits in reserve currency issuers and
surpluses in countries engaging in large-scale reserve accumulation.
• External balance sheet risks: Reserve-related inflows and subsequent outflows into riskier
investments (including equity and foreign direct investment) are found to be related to safe
asset providers’ superior financial intermediation capacity (Mendoza and others, 2009). These

18 It is generally recognized that what constitutes adequate or excessive reserves depends to some extent on a
country’s exchange rate regime, as well as other considerations such as foreign exchange liquidity needs for financial
stability (IMF, 2016k).
19 Although the discussion here focuses on the systemic effects of reserve accumulation, reserves could be costly at
the individual country level; reserve purchases generally result in lost interest income and exposure to potentially
large capital losses in case of strengthening of the domestic currency against reserve currencies. Large reserve
holdings in effect remove substantial amounts of high-quality liquid assets from the market, contributing in some
measure to recent signs of reduced liquidity in securities markets.
Figure 11. Reserve Flows Relative to
Macroeconomic Aggregates of Reserve
Currency Issuers
(cumulative flows 1999-2016, in percent)
Sources: National sources; Haver Analytics; IMF,
COFER survey; BIS; and IMF staff calculations.
CONSIDERATIONS ON THE ROLE OF THE SDR
INTERNATIONAL MONETARY FUND 19
flows raise the reserve currency issuers’ external balance sheets and their exposure to external
shocks (Maggiori, 2017). Furthermore, with reserve-related flows easing financial conditions in
reserve currency issuers, borrowing in those currencies becomes more attractive for others,
posing increased risk of currency mismatches (McCauley and others, 2015).
• Inefficiency in consumption and investment: Reserve-related flows help sustain inefficiencies in
the allocation of consumption and investment across countries, by diverting capital from highproductivity to low-productivity investments. Alfaro and others (2014) find that the reserverelated investments and other official flows help explain the capital flows from faster-growing to
slower-growing economies.
• Interest rates: Foreign official holdings have a sizable impact on the U.S. Treasury yield curve: a
reduction in foreign holdings of U.S. Treasuries by $100 billion would increase yields by 1.5-1.8
basis points (Csonto and Tovar, 2017).20 Reserve-related flows have thus contributed to reserve
currency issuers being disproportionately affected by the lower bound (Caballero and others,
2016). At the same time, reserve currency issuers benefit disproportionately from the use of their
currencies as reserves, deriving seigniorage benefits from the ability to borrow more cheaply
than would otherwise be possible.
III. ADDRESSING IMS WEAKNESSES WITH THE SDR
26. The above considerations lay the foundation for discussion of how a broader role for
the SDR could address the identified weaknesses of the IMS. Previous assessments have
identified options to strengthen the IMS and emphasized a potential enhanced role of the O-SDR,
but analysis of the economic effects of the M-SDR or U-SDR has not been undertaken systematically
(IMF, 2010a; 2010b; 2011a; 2011b; 2016c). This section discusses which conceptual forms of the SDR
might address three weaknesses of the IMS identified in Section II.B, namely by (a) smoothing
external adjustment, (b) addressing gaps in official international liquidity provision, and (c)
mitigating any systemic side effects of reserve accumulation.21 It also discusses the major challenges
to the SDR assuming a greater role. The discussion tentatively suggests that the O-SDR may
potentially have a more promising role than the M-SDR or U-SDR (see Figure 12 for a highly stylized
schematic diagram), but there are also important challenges for a broader role of the O-SDR.
A. Could the SDR Help Smooth External Adjustment?
Form Potential Impact Drawback
O-SDR Allocation could provide liquidity
buffers
Lack of conditionality may create moral
hazard; poor targeting
M-SDR Pre-packaged diversification against
capital flow and balance sheet risk
Lack of customization; high cost due to
underdeveloped market; basket revision risk
U-SDR More stable trade receipts/payments;
responsive trade volume adjustment
Limited global impact as SDR valuation
already reflects currency of trade invoicing

20A rule of thumb estimate indicates that each 1 percent change in foreign exchange reserves (keeping the
composition constant) changes Treasury yields by 1 basis point in the opposite direction.
21 Weaknesses within the IMS may be best addressed directly through improved policymaking, aided by surveillance.
Risks due to policy uncertainties and potential for missteps suggest that other options, including a potential
enhanced role for the SDR, may also help strengthen the IMS.
CONSIDERATIONS ON THE ROLE OF THE SDR
20 INTERNATIONAL MONETARY FUND
Figure 12. Schematic Summary of Potential SDR Contributions to IMS
(if challenges are overcome)
Drivers: Interconnectedness, capital volatility, financial frictions
External adjustment
difficulty
Excess Reserve
Accumulation
Liquidity Provision
Gaps
M-SDR, if market well
developed:
More stable balance sheets
if prepackaged
convenience outweighs
lack of customization. This
can lower reserves
demand, but scope for
rises in safe asset supply is
likely modest.
Potential Role
for SDR:
U-SDR:
Stable trade and financial
receipts/payments, but high
correspondence between SDR
basket and currency shares in
international transactions.
O-SDR:
Unconditional allocations smooth
adjustment and provide liquidity, but
poor targeting and moral hazard.
O-SDRs created outside the usual
allocation or a trust pooling O-SDRs
could finance conditional liquidity
provision if sufficient resources found.
Reduce reserve demand if seen as
substitute.
Frequent O-SDR exchange rate
and interest rate updates help
M-SDR pricing.
Scope for official support.
SDR trade can
boost SDR
instruments and
vice versa.
KEY:
Significant systemic impact if challenges overcome
Modest systemic impact
Complementarities
IMS
Weaknesses:
CONSIDERATIONS ON THE ROLE OF THE SDR
INTERNATIONAL MONETARY FUND 21
27. The O-SDR currently plays a limited role in the IMS. Despite the aim of the Second
Amendment of the AoAs to make the SDR “the principal reserve asset in the international monetary
system,” the SDR’s role as an international reserve asset has been limited: only the official sector can
hold SDRs; there have been only three general allocations; and the global stock of SDRs has
averaged just over 3 percent of global reserves since 1970.
28. A lack of consensus around additional O-SDR allocations reflects, in part, moral hazard
concerns. With no conditions on the use of O-SDRs, and the reconstitution requirement in
abrogation (requiring a country to maintain its average holdings of SDRs at a specified percentage
of its allocation over a certain time frame), O-SDRs can conceivably be used to defer warranted
macroeconomic adjustment. Evaluating such concerns is complicated by the SDR’s modest size
relative to reserve holdings (rarely exceeding 20 percent) and limited historical evidence. For the
2009 allocation, staff analysis (IMF, 2016e) and anecdotal evidence from staff reports show some
delayed rather than smoothed adjustment, but not widespread misuse (Box 3). While reinstating the
reconstitution requirement could go some way toward addressing moral hazard concerns, it would
also significantly reduce the attractiveness of the O-SDR as a reserve asset.22 More fundamentally,
large additional allocations could magnify concerns over reluctance to enact needed adjustment
policies including exchange rate flexibility where appropriate. Moreover, they would require
enhanced co-operation to finance higher volumes of O-SDR exchange by raising contingent claims
on existing foreign exchange reserves, which may cause unease among potential suppliers of such
currencies.23
29. But additional O-SDR allocations could indirectly facilitate adjustment by increasing
liquidity buffers.24 The impact of increased O-SDR unconditional allocations on buffers depends
crucially on how recipients of the allocations respond.25 If the O-SDRs are not fully offset by declines
in reserve currency holdings and overall liquidity buffers increase, this may boost confidence and
hence reduce the extent of capital outflows, which could reduce the amount of adjustment needed.
Also, this should help address the asymmetric adjustment problem by providing a source of
financing if large capital outflows materialize. More generally, it can provide the space to support
implementation of needed adjustment measures.

22 This could be mitigated somewhat through a price-based scheme with a sliding interest rate scale applied to a
member’s drawdown (IMF, 1980).
23 Currently, the system relies primarily on voluntary trading arrangements (VTAs) with participants in the SDR
Department. It is backed up by the SDR designation mechanism under which participants in the SDR Department
whose BOP and reserve positions are deemed sufficiently strong must, when designated, provide freely usable
currencies in exchange for O-SDRs up to specified amounts (AoA XIX; IMF, 2016j). VTAs continue to have ample
capacity to handle participants’ current requests for SDR sales (IMF, 2017c). However, if the role of the SDR were
enhanced, analysis would be required on holders’ willingness to support the system.
24 Increased official provision of global liquidity, which will be discussed more fully in Section III.B, could also be
supported by using the SDR to finance conditional lending. This can also aid external adjustment.
25 The impact of additional O-SDR allocations may also be affected by broader developments within the GFSN. For
instance, regional financial arrangements (RFAs) have grown in size since the GFC, and could theoretically reduce the
need for own reserves or O-SDRs, although they remain largely untested.
CONSIDERATIONS ON THE ROLE OF THE SDR
22 INTERNATIONAL MONETARY FUND
Box 3. How Did Countries Use Their 2009 SDR Allocation?
While SDR sales spiked briefly following the 2009 SDR allocation, there is little evidence of widespread moral
hazard.
SDRs can be used in a number of ways. The main “use” of SDRs is in supplementing existing official
reserves. This can be fulfilled by holding SDRs or by converting them into freely usable currencies through
VTAs, changing the composition of reserves. SDRs can also be used indirectly after being converted to freely
usable currencies, e.g., to pay for imports, meet external debt obligations, or for intervening in foreign
exchange markets. Finally, SDRs can be used directly, e.g., to make quota payments, repurchases, pay
charges and fees to the Fund, or to provide resources for the Poverty Reduction and Growth Trust.
What happened after the 2009 allocation? In the first year following the allocations (September 2009 to
September 2010), SDR sales spiked briefly. A total of 21 countries, mostly emerging markets (EMs) and lowincome countries (LICs), sold some SDRs amounting to a relatively small part of the allocation (SDR 3.2
billion). Some 90 percent of these members sold at least 75 percent of their 2009 allocations (excluding sales
associated with program-related purchases). Taking a longer period from September 2009 to June 2015, and
excluding sales associated with program-related purchases from the Fund, there were 29 sellers. Those with
an investment grade rating sold on average about 20 percent of their individual 2009 allocations, while
sellers with a non-investment grade rating sold about 40 percent. During this longer period, all 4 investment
grade sellers were EMs, while the 25 non-investment grade sellers consisted of 9 EMs and 16 LICs. After the
14th General Review of Quotas became effective in January 2016, around half of the members chose to
make part of their quota subscription payments in SDRs rather than in freely usable currencies, possibly
using their 2009 SDR allocations. Also, a few borrowing members repaid their IMF loans using the 2009 SDR
allocations.
There is little evidence of widespread moral hazard. The allocations were made at the height of the GFC
to bolster reserves and help the membership navigate the crisis. Finding evidence that it was used to finance
overly-expansionary and/or unsustainable policies, or delayed rather than smoothed needed adjustment, is
difficult. That said, if the allocations were used to that end, they could result in higher short-run inflation.
Building on Chitu (2016), staff analysis using a difference-in-difference regression finds some modest
evidence that the 2009 allocations may have had a short-term inflationary impact, but no long-term effect
on inflation. A logit regression analysis over August 2009-December 2010, the peak SDR sales period, finds
that countries with fiscal deficits or deteriorating current account balances had a statistically significant
higher probability of selling SDRs. Finally, a survey of staff reports over 2009-10 reveals anecdotal evidence
of uses by some members of the allocation, including budget financing, that could be seen as delaying the
recommended policy adjustment.
CONSIDERATIONS ON THE ROLE OF THE SDR
INTERNATIONAL MONETARY FUND 23
30. Reforms, including alternative targeting
mechanisms, could allow a smaller allocation to
attain a larger systemic impact. Under the
current mechanism, almost 60 percent of any new
allocation would accrue to reserve-issuing AEs,
who have low reserve demand and are unlikely to
use them to avoid external adjustment (Figure 13).
For countries where reserve demand is high and
O-SDRs could serve as a useful buffer, the share of
allocations (around 30 percent) would be well
below this group’s share of reserve holdings
(around 60 percent). Alternative targeting
mechanisms, such as one taking into account an
individual country’s reserve demand, could allow a
smaller overall allocation to attain a larger
systemic impact. However, alternative mechanisms
could amplify concerns about recipients’
adjustment incentives and not eliminate unease
among potential suppliers of reserve currencies for
O-SDR exchange. Alternative allocation mechanisms would require an amendment to the AoAs.
31. There have been proposals for amendments of the current system to allocate O-SDRs
contingent on global conditions and/or meeting policy criteria. O-SDR allocations contingent
on global conditions could help countries avoid unwarranted adjustment when a sudden stop in
capital flows is unrelated to a country’s fundamentals. To reduce allocation uncertainty, regular
annual allocations could be put in escrow, with the IMF Executive Board or Board of Governors able
to release the O-SDRs at times of systemic stress. Such a scheme would alleviate concerns of
misused allocations at normal times, but it would not withhold allocations from countries in need of
adjustment. However, such changes would require amendment of the AoAs. Such contingent global
allocations could also be combined with ex post or ex ante policy conditionality on countries to
incentivize external adjustment or signal confidence in the borrower’s policies.
32. M-SDRs could reduce the sensitivity of balance sheets and capital flows to
developments in any single economy. This would apply particularly to foreign exchange and
interest rate risks. The M-SDR, a basket of imperfectly correlated currencies (see Annex I of IMF,
2016f), has less volatile and, for the most part, higher risk-adjusted returns than most equivalent
single foreign-currency denominated instruments (Figure 14).26 M-SDRs could also lower the
sensitivity of capital flows and the overall exposure of economies to developments in any single
reserve-issuing economy, alleviating constraints on domestic policy. EMs would stand to benefit the
most from the M-SDR’s diversification properties due to the natural hedge it can provide their
economies.
27

26 This would also serve to limit the extent of valuation changes in response to fluctuations in the domestic currency.
The gains may be limited, however, since most countries’ reserve holdings are already partially diversified.
27 EM financial indicators have been negatively correlated with the U.S. dollar index.
Figure 13. Foreign Exchange Reserves and IMF
Quota Shares
(percent)
Sources: IMF, International Financial Statistics; Haver
Analytics; and IMF staff calculations.
1/ Excludes gold.
2/ According to COFER database, i.e., Australia, Canada,
Euro Area, Japan, Switzerland, the United Kingdom, and
the United States.
3/ Excludes reserve-issuing Advanced Economies.
CONSIDERATIONS ON THE ROLE OF THE SDR
24 INTERNATIONAL MONETARY FUND
33. But M-SDR currency weights may not be optimal for most users. SDR basket weights
broadly reflect the existing pattern of international currency use and exposure on aggregate
(Table 1). This could make M-SDRs a convenient currency diversification instrument, providing
efficiency and risk-reduction benefits for some participants in international transactions. The
periodic reweighting of the basket may create a source of risk that is hard to model in the short
term, but over the medium term has the advantage of stabilizing the M-SDR’s value and keeping
weights aligned with patterns of international currency use. Moreover, the M-SDR currently offers
exposure to a currency subject to capital controls for private investors.
28 However, M-SDRs offer only
one of many potential sets of portfolio weights, regardless of the composition of the SDR basket.
Market participants note that customized portfolios could achieve hedging needs better and
relatively cheaply for many individual participants including firms and institutional investors.
34. Diversification benefits require an efficient M-SDR market. Deep, liquid markets
facilitate efficient price discovery, liquidity, low transaction costs, and the availability of standardized
derivatives, which reinforces use of the currency, creating network externalities and lock-in effects.
Currently, only a few markets achieve these. In the currently limited M-SDR market, hedging and
transaction costs outweigh the diversification benefits for most issuers and institutional investors.
Market participants highlight that a liquidity premium would likely be required until market activity
becomes sufficient to construct a benchmark yield-curve and undertake cross-currency swaps at
desired maturities. For instance, despite benefitting from the movement toward European monetary
integration, the ECU traded at a discount to its theoretical value for long periods (Dammers and
McCauley, 2006). Even with regular issuance of high-quality instruments at sufficient volume, it
would be challenging to identify a ‘risk-free’ benchmark.

28 The RMB is subject to capital controls for private investors, although the M-SDR offers limited exposure to it and
there is an active offshore RMB market. Agents taking counterpart positions may find it difficult to hedge against
such a currency.
Figure 14. Risk and Risk-adjusted Returns
(one-month bonds, 2006-2016)1/
Risk—standard deviation Risk-adjusted return—Sharpe ratio2/
Source: Tovar (2018); and IMF staff calculations.
1/ Note that RMB was not a widely-traded currency for most of the period of analysis.
2/ The risk-adjusted return has been corrected to account for negative returns.
CONSIDERATIONS ON THE ROLE OF THE SDR
INTERNATIONAL MONETARY FUND 25
35. Using the U-SDR in trade invoicing and commodity pricing could provide greater
stability of receipts and payments in domestic currency terms and enable more symmetric
trade adjustment.
• Commodity prices have been 7-15 percent
less volatile in SDR terms than in U.S.
dollars (Figure 15; see IMF, 2011b). This
suggests that U-SDR pricing would
modestly increase the stability of export
receipts or import bills in domestic currency
terms, although many firms can manage
currency risk using financial instruments.
Moreover, transaction costs would rise for
issuers of dominant currencies.
• Use of the U-SDR, as opposed to a reserve
currency, in trade invoicing by a large
number of firms could reduce asymmetry in
the short-run response of trade volumes to
exchange rate movements. For instance, a
depreciation against a reserve currency
would improve price competitiveness of exports if they are priced in U-SDR rather than in the
reserve currency. The resulting stronger export response could aid external adjustment for some
countries. The benefits would be limited on a global scale since the SDR valuation already
reflects the currency composition of trade invoicing (Table 1), although exporters and importers
with concentrated currency invoicing weights that are not aligned with the geographic
distribution of trade would gain.
B. Could the SDR Help Fill Gaps in Official Provision of International
Liquidity?
Form Potential Impact Drawback
O-SDR Could finance conditional lending Requires co-operation from reserve currency
issuers or many large members
M-SDR
U-SDR
Wider use modestly increases
access to international financing
Limited value added if SDR basket matches
existing reserve currency weights in
international transactions
36. Potential gaps in the Fund’s lending capacity could be filled by using O-SDRs as a
source of finance. The primary source of Fund resources are quota subscriptions, which, together
with borrowing from official sources, have served the Fund well for decades. These avenues should
be considered first when discussing adequacy of Fund resources and lending capacity. However,
there could be a potential need for new instruments, for instance a standing facility to respond to
Figure 15. Commodity Price Volatility
(standard deviation of commodity price indices
over 1992-2016, 2005=100)
Sources: IMF, International Financial Statistics; and IMF
staff calculations.
1/ Average for selected AEs with floating exchange rate
regimes (Australia, Canada, and New Zealand).
0
10
20
30
40
50
60
70
80 All commodities Agricultural Food Energy Metals Oil Coal Wheat Rubber
U.S. dollars
SDRs Domestic currency 1/
CONSIDERATIONS ON THE ROLE OF THE SDR
26 INTERNATIONAL MONETARY FUND
unforeseen, large-scale events (IMF, 2016b).
29 Such a standing facility could secure large, predictable
access on a precautionary basis to countries satisfying ex ante criteria. 30 31 One option for such a
facility could be for O-SDRs to be allocated in exchange for newly-issued reserve currencies, making
the outside supply of reserve currencies elastic in a crisis (Obstfeld, 2011). However, such
fundamental changes would require amendment of the AoAs, and commitments from reserve
currency issuers to exchange SDRs for their currency.32 Key design issues for the funding of such a
facility on the basis of a redesigned O-SDR include: the allocation of credit risk associated with such
large scale precautionary access; the mechanism for covering expected losses; the safeguards
needed to ensure the proper functioning of the VTAs; the encashability of the committed resources
to be considered part of reserve assets; and the bearer of the SDR interest cost.
33
37. A trust pooling O-SDRs could provide an alternative source of finance. Countries that
rarely intervene in foreign exchange markets could pool their SDR holdings in a trust that could
provide financing to countries according to the mandate of the trust facility. This mechanism would
be akin to the SDR loans provided by some members to the Poverty Reduction and Growth Trust
(PRGT) and is feasible under the current AoAs. The credit risk in such a scheme would lie with the
contributors to the pool. If the pool were a Fund-administered account or trust (held on behalf of
the trust by a prescribed holder as in the case of the PRGT), the credit risk would still remain with
creditors, but could potentially be mitigated if a reserve account were established to provide a
buffer, although this would require agreement on the funding of such a buffer. The other
operational considerations discussed in the paragraph above would also be relevant for the trust
scheme. To secure sufficient resources, the trust could issue securities (e.g., M-SDRs) or the pool
could be expanded by additional O-SDR allocations.34 Contrary to the proposal to exchange O-SDRs
for reserve currencies discussed above, the trust would have moderate lending capacity, unless
supported by large SDR allocations and high leverage.
38. The impact of the M-SDR and U-SDR on the demand for official provision of
international liquidity would be modest. To the extent that widespread use of M-SDRs and USDRs lowers the sensitivity of capital and trade flows and the overall exposure of economies to
policies in any single reserve-issuing economy, it could translate to more stable access to

29 A financing gap could emerge under a severe, widespread shock, given current access levels. The GFC illustrates
the potential scale of financing requirements in such a scenario where bilateral swap lines from reserve currency
issuers played a large role (IMF, 2011e).
30 A standing facility is distinct from the liquidity facility recently discussed (IMF, 2017d). The standing facility would
be used for large-scale BOP needs arising from systemic events while the liquidity facility was intended to cover BOP
needs arising from shocks of moderate size, which result from volatility in international markets and would not
require additional Fund resources. The liquidity facility envisaged repeated drawings. Using the O-SDRs to finance a
liquidity instrument would potentially encounter objections similar to those faced by the proposed liquidity facility.
31 Ocampo (2010), Truman (2008; 2011), Farhi and others (2011), Triffin International Foundation (2014), de Cecco
and Giavazzi (1996); Boughton (2001), and Garritsen de Vries (1985a).
32 Such a facility might be preferable to bilateral swap lines by reserve currency issuers in as much as it might
enhance systemic stability by providing a more predictable and multilateral approach in the context of a Fund policy
instrument (Destais, 2014; Weder di Mauro and Zettelmeyer, 2017).
33 The operational details of such a facility are beyond the scope of this paper.
34 A trust issuing securities was proposed for financing the response to climate change (Bredenkamp and
Pattillo, 2010).
CONSIDERATIONS ON THE ROLE OF THE SDR
INTERNATIONAL MONETARY FUND 27
international financing, reducing demand for official international liquidity provision. However, as
noted above, the effects would be constrained by the high degree of correspondence between the
weights in the SDR basket and the importance of the main reserve-issuing currencies in international
transactions.
C. Could the SDR Help Mitigate the Systemic Side Effects of Reserve
Accumulation?
Form Potential Impact Drawback
O-SDR Could substitute for precautionary
reserves
Requires co-operation from reserve currency
issuers or many large members
M-SDR Stability could reduce precautionary
demand and increase safe asset
supply
Limited value-added as SDR basket
corresponds to existing reserve currency
weights in international transactions
Issuers limit safe-asset supply
U-SDR Stability could reduce precautionary
demand
….
39. The O-SDR could reduce the side
effects from precautionary reserve
accumulation. Slowing down reserve
accumulation would require O-SDRs to be
held as substitutes for other reserves,
suggesting that the impact would be limited
to reserves held for precautionary motives.35
Illustrative calculations applying the IMF’s
reserve adequacy metric (IMF, 2011d; 2015c)
suggest that precautionary motives have
indeed played a substantial role in reserve
accumulation: non-precautionary reserves now
account for roughly one-quarter of the global
total, falling from more than a third in 2011
(Figure 16).36 Furthermore, if O-SDRs helped
expand coverage of precautionary facilities,
the need for precautionary reserves could be reduced. As discussed earlier, large scale additional
allocations could necessitate co-operation to facilitate exchange between O-SDRs and reserve
currencies.

35 O-SDRs would not substitute for reserves accumulated for purposes of maintaining exchange rate competitiveness
for export-led growth because the O-SDRs would not affect the exchange rate in the same way that foreign
exchange intervention would. Similarly, O-SDRs would be unlikely to substitute for commodity or intergenerational
savings funds included in reserve holdings, which, unlike the O-SDRs, provide an endowment with a future stream of
net income.
36 Results at the individual country level are in line with those in IMF (2016i) and empirical work using alternative
metrics (Obstfeld and others, 2010; Ghosh and others, 2014).
Figure 16. Precautionary and NonPrecautionary Reserves
(trillion SDR)1/
Source: IMF staff calculations.
1/Total reserves are below world reserves shown in
Figure 3 as a handful of countries are excluded from this
analysis due to lack of data availability.
0
1
2
3
4
5
6
7
8
9
10
1999 2001 2003 2005 2007 2009 2011 2013 2015
Non-precautionary
Precautionary (100 to 150 percent of metric)
Precautionary (up to 100 percent of metric)
Total
CONSIDERATIONS ON THE ROLE OF THE SDR
28 INTERNATIONAL MONETARY FUND
40. The M-SDR could impact the IMS by
diversifying the composition of reserve-related
assets. As noted earlier, currency diversification of
reserve-related assets (with corresponding effects
on liabilities) could reduce current account
imbalances, lower external balance sheet risks, and
promote more efficient consumption and
investment. The M-SDR could help achieve this. For
example, if the currency composition reflected the
SDR basket weights (and under the assumption
that M-SDRs were widely used in international
financial activity), the EBA model suggests that the
U.S. current account norm would increase by
1.0 percent of GDP (Figure 17). The current account
norms of other reserve currency issuers would be lower under this scenario, reflecting the
hypothetical increase in the shares of their liabilities in international reserves. Furthermore, greater
use of the SDR could lead to a broader distribution of seigniorage benefits.
41. But any impact on the global supply of safe assets would likely be small. Greater net
availability of safe reserve assets, including SDR-denominated assets, would require borrowers of a
high credit quality to shift issuance from non-reserve currencies (presumably their own) to M-SDRs
without undermining the quality of their assets due to the added exchange rate risk.37 However, the
incentive for such a shift seems limited, and the volumes of such issues are modest. Hence, the
overall impact of M-SDRs on the global supply of safe assets would likely be small.
IV. COULD THERE BE COMPLEMENTARITIES FROM
USE OF THE SDR IN MULTIPLE CONCEPTUAL FORMS?
42. An ecosystem may be required to generate network externalities and attract a large
share of transactions. The national currencies that play international roles do so across a wide
spectrum of activity—as means of payment, unit of account, and store of value – supported by their
depth, liquidity and network externalities. Achieving these conditions is a key challenge for the MSDR and U-SDR to reduce the costs of uptake relative to their potential benefits. However, there are
potential complementarities between these two concepts and scope for the O-SDR and official
support to provide a more supportive environment which could help reduce overall costs.
43. M-SDRs and U-SDRs could be mutually re-enforcing. Increased prevalence of U-SDRdenominated transactions could be financed or hedged using M-SDRs, which would increase M-SDR
liquidity and reduce transactions costs. Greater M-SDR use might encourage agents to price
transactions in U-SDRs. The ability to make secure payments in a stable unit of account would likely
spur wider use of the M-SDR and U-SDR.

37 For the same quality borrower, a switch from issuance in existing reserve currencies to M-SDR could indeed
enhance the “safety” of the instruments due to the diversification properties of the M-SDR.
Figure 17. Impact of Reserve-Related
Liabilities on Current Account Balances
(percent of own GDP)
Source: IMF staff estimates.
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
United States Euro area United
Kingdom
Japan China
Impact of reserve liabilities on current account norm
Change if reserves reflect SDR weights
CONSIDERATIONS ON THE ROLE OF THE SDR
INTERNATIONAL MONETARY FUND 29
44. Market scale and liquidity would be critical for a self-perpetuating uptake of the MSDR. A stable and substantial base of issuers and investors will likely be required to bring down the
costs of using M-SDR instruments and to eliminate any illiquidity premium. Market participants
emphasized the importance of a benchmark yield curve?particularly at the short-end?for pricing
instruments through regular issuance of high-quality instruments. Cross-country data on sovereign
debt show a negative relationship between the amount of outstanding debt and bid-ask spreads, an
indicator of the liquidity risk premium (Figure 18). Preliminary staff analysis suggests a market size of
$100 billion could sustain a liquid debt securities market and accompanying derivatives market.
Exchange Traded Funds (ETFs) are popular and conducive to replicating the SDR by holding its
constituent currencies. Depending on investor demand, they could subsequently promote the SDR
bond market by holding M-SDR instruments.
Figure 18. Bid-Ask Spreads and Bond Stocks Outstanding
Dollar-denominated bonds Euro-denominated bonds
Sources: Bloomberg; and IMF staff estimates.
45. The M-SDR would need to overcome market infrastructure, settlement, and revision
risk challenges. Providing continual pricing of the O-SDR against main global currencies and
increasing the frequency of O-SDR interest rate resets (currently weekly) would facilitate pricing MSDRs and marking holdings to market. The composition and weighting of the SDR basket are
subject to periodic revisions by the IMF’s Executive Board. Large, unexpected revisions could have a
significant impact on the SDR’s valuation and its properties. However, most changes to the basket
have been small and the risk can be modeled.
38 Widespread use of M-SDRs would likely require the
development of M-SDR accounts such that transactions are settled directly in SDRs (Coats, 1982).
Until then, M-SDRs would need to be settled in a currency, which would create an additional step in
transactions and leave participants exposed to these currencies.39 In addition to settlement
infrastructure and legal certainty in a well-regarded jurisdiction, there would be a need to set up
clearing arrangements and develop market segments (e.g., derivatives and money markets).

38 Market participants understood the importance of retaining a role for the Board’s judgment over the SDR basket,
but felt that more transparency in determining currency inclusion and weights could make changes more predictable.
39 For example, recent M-SDRs issued in China specify settlement in RMB. Settlement in other currencies in other
jurisdictions may pose currency risks due to the limited convertibility of the RMB.
BEL
CAN
CHL
COL
HRV
LVA
LTU
MEX
SVK
SVN
KOR
BHR
IDN
OMN
PRY
PER PHL
0.0
0.2
0.4
0.6
0.8
1.0
1 10 100 Bid-ask spread on benchmark government bonds (12 month average, in percent)
Log of amount outstanding (billion U.S. dollars)
BGR BEL
CAN
CHL
COL
CZE
LVA
LTU
MEX
NLD
SVK
SVN
KOR
IDN PER
0.0
0.2
0.4
0.6
0.8
1.0
1 10 100 Bid-ask spread on benchmark government bonds (12 month average, in percent)
Log of amount outstanding (billion euros)
CONSIDERATIONS ON THE ROLE OF THE SDR
30 INTERNATIONAL MONETARY FUND
46. Official sector support could offset transaction costs and develop market
infrastructure, though uptake may still be hard to achieve (Box 4). Given network externalities,
official support may be needed to help the M-SDR overcome threshold effects. Official sector
actions—including by potential “first-mover” issuers, regulatory authorities, and official providers of
market liquidity—could be conducive to market development and spur private initiatives to develop
other necessary elements of the market ecosystem. Support is not without its own challenges and
may not be sufficient to make M-SDRs a better value proposition than customized or hedged
currency portfolios.
47. The U-SDR would also face impediments. A clearance/payments system would be needed
to settle SDR claims cost-effectively. This would also avoid having final settlement undertaken in
currencies, which would expose parties in the transaction to currency risk. Uncertainty on the
Box 4. How Might Official Sector Support Encourage M-SDR Activity?
Official sector support to help overcome threshold effects could include the following initiatives:
• A regular program of M-SDR bond issuance by multilateral development banks (MDBs) or
sovereigns. This could help establish benchmarks for pricing SDR-denominated securities that could be
issued by the private sector. Substantial issuance would enable the inclusion of SDR instruments in bond
market indices, which in turn would encourage demand from institutional investors. MDBs that already
engage in market issuance may be attracted to issue M-SDRs to manage currency risks and portfolio
adjustment, although they already have the ability to fully hedge exposures. MDBs could also
denominate part of their lending (likely involving a premium) in SDRs. Overall, official sector support
would impose additional costs on their operations, at least initially.
• M-SDR bond issuance by the IMF. Such issuance would help develop the market and provide
resources for IMF lending (IMF, 2011b). Issuance in large enough amounts to form a benchmark yield
curve during normal times, when demand for use of IMF resources is low, would likely require amending
the AoAs and fundamentally alter the financing model of the IMF, raising major policy and regulatory
issues.
1
• Providing liquidity backstop facilities for the market. Central banks could provide a repo facility for
investors to pledge their M-SDR assets in exchange for short-term liquidity in convertible currencies
(provided the instruments meet other requirements such as credit risk). O-SDRs, rather than convertible
currencies, could be provided by central banks, although such a step would require amending the AoAs
to permit the private sector to hold O-SDRs. M-SDR bonds could also include put options, which would
give the investor the right to sell the security back to the issuer at a predetermined price. Official
institutions could also offer instruments in currency and interest swap markets to facilitate liquidity.
• Clarifying regulatory issues and promoting the development of other elements of market
infrastructure. The demand for M-SDRs will crucially depend on their regulatory treatment, e.g. how
banks’ reserve requirements on SDR-denominated deposits are calculated and constituted, or whether
M-SDR instruments are liquid enough to qualify as high-quality liquid assets under the Basel III liquidity
coverage ratio.
1/ As discussed above, such issuance could be conducted by a trust in which members pool existing O-SDR holdings and
augment resources with M-SDR issuance for on-lending.
CONSIDERATIONS ON THE ROLE OF THE SDR
INTERNATIONAL MONETARY FUND 31
outcome of SDR reviews could affect the SDR’s attractiveness as a unit of account, though the
impact of basket revisions on the SDR’s longer-term value has generally been modest, allowing the
SDR to act as a stable measure (IMF, 2016g). Also, demand for data reporting is currently limited.
Publishing statistics denominated in SDRs could smooth (but not fully remove) valuation changes
from fluctuations among major currencies. In a survey, national data compilers generally did not see
significant demand for SDR-denominated statistics, while the appetite of data users was limited. This
highlights that broad take-up of the U-SDR would have to overcome network effects/switching
costs.
V. THE SDR IN THE FUTURE IMS
48. Economic and technological developments create uncertainties about the future shape
of the IMS and might increase or decrease the merits of the SDR. The global economy is
becoming more multipolar, with the potential for shifts in the demand for, and supply of, reserve
assets. Yet the pace of such shifts is subject to uncertainty, which is amplified by new financial and
other technologies as well as policy choices. This section aims to initiate a discussion on risks to the
IMS from multipolarity and financial innovations such as DLTs, which may have implications for the
economic role of the various SDR concepts. Both topics are subject to high uncertainty, go
beyond the scope of this paper—as they are broader than the SDR—, and deserve further
scrutiny.
A. Uncertain Economic Transitions
49. Shifting economic weights raise the prospect of a more multipolar global economy.
Rapid financial and economic integration of EMDEs are driving convergence and creating more
potential sources of global economic influence, which would create a more multipolar global
economy. However, the timing of these trends is hard to predict given uncertainties around support
for and policy reactions to global economic integration as well as inherent difficulties in anticipating
the impact on integration from the pace of technological change.
50. It is uncertain how international currency use would change.
40 41 Growth in demand for
reserves might outpace growth in the liquid liabilities of a small number of AE issuers who represent
a shrinking portion of the global economy. However, EMDEs may not require additional foreign
exchange reserves as they grow, as their own financial markets develop, and as their exchange rate
flexibility increases (Bordo and McCauley, 2017). On the supply side, it is unclear when alternative
sources of “safe assets” will emerge, or where. Economic heft is not enough: financial market
development, institutional reforms, and geopolitical factors also matter. Network effects and inertia
due to habit formation could slow down the impact of multipolarity trends on the international use
of currencies. But new evidence suggests network effects may be weaker than previously believed

40 The global financial system has experienced periods during which multiple currencies played a leading role, such
as before 1914 and between the two world wars, though the extent of financial integration—and thus the effects of
reserve-issuing status—was much lower in those eras (Lindert, 1969; Eichengreen, 2014). The subsequent transition
away from reserve multipolarity (Singleton and Schenk, 2015) increased the influence of policies at the center.
41 Figure 8 suggests the relative importance of the major anchor currencies has been changing. Tovar and Mohd Nor
(2018) provide some evidence of increasing Chinese renminbi influence, although no further gains have been
observed since 2012.
CONSIDERATIONS ON THE ROLE OF THE SDR
32 INTERNATIONAL MONETARY FUND
and are declining due to technological advances; this could support a quicker transition
(Eichengreen, Mehl and Chitu, 2017).
51. Transition risks to the IMS may be significant. Uncertainties about how the supply and
demand for reserves will evolve highlight the systemic risk of insufficient liquidity or a deterioration
in the quality of “safe assets.” If inertial forces prove limited, this could result in rapid and volatile
changes in currency composition of reserve assets. Yet if they prove strong, concerns associated
with the Triffin dilemma over the sustainability of continued accumulation of claims on a limited set
of assets could eventually become acute, which could risk an even more disorderly shift. Moreover,
network effects imply that, once pressures build to overcome strong inertia, the shift of safe asset
holdings to new issuers could be substantial and cause disruptive movements in exchange rates and
capital flows. Moreover, in times of global stress there could be uncertainty as to whether there
would be one preferred source of global liquidity (as during the GFC), multiple lenders of last resort
either co-operating globally or acting within their regional spheres of influence, or insufficient
liquidity in a globally fragmented system. Such uncertainty could be exacerbated by geopolitical
developments.
52. There is also no consensus as to whether a multipolar reserve system would be more
stable than a unipolar one. After a transition period, the availability of multiple reserve issuers
might facilitate supply while incentivizing policy discipline in each issuer and giving greater need for
international policy coordination. However, whether these effects would materialize depends on IMS
characteristics such as relative sizes of currency issuers, relative scarcity of reserve assets, the system
of exchange rates, commitment to low inflation and other macroeconomic characteristics, as well as
how they influence the supply of reserves by currency issuers (Farhi and Maggiori, 2016; He and
others, 2016).42 With more reserve issuers, the system could also be potentially exposed to more
frequent and pronounced portfolio shifts.43
53. An SDR-denominated substitution account could support the transition to a more
multipolar IMS, but would face serious obstacles. Proposals for a substitution account were
debated in the 1970s and early 1980s, and the idea has resurfaced since the GFC. Holdings of
foreign exchange would be placed in an IMF-administered account in return for SDR-denominated
claims. The account would in turn hold long-term claims on reserve currency issuers (McCauley and
Schenk, 2015; Boughton, 2001). This would diversify the currency composition of reserve holdings in
off-market transactions so as not to disrupt foreign exchange markets, given the potential large
scale of shifts in their reserve portfolios. Furthermore, if the claims on the account were tradable,
they could support M-SDR activity. At the same time, a substitution account could be subject to
sizeable foreign exchange risks, especially if there were to be large and un-hedged swings in the
underlying exchange rate exposures. Moreover, the account’s asset holdings could potentially be
subject to credit risks. Past discussions of such an account came to an impasse over who would bear
the potential costs associated with exchange rate and interest rate risk in the account— issues that

42 For example, if issuers cannot commit to not inflating away debts, worsening coordination problems might reduce
the supply of reserve assets and reduce the stability of the IMS.
43 This phenomenon was first highlighted for the interwar period, and related to shifts between the British pound and
U.S. dollar (Nurkse, 1944).
CONSIDERATIONS ON THE ROLE OF THE SDR
INTERNATIONAL MONETARY FUND 33
could be even more pronounced in the transition to a more multipolar system as some currencies in
the account depreciate over time against the O-SDR.44
54. Increasing multipolarity could magnify potential benefits of the SDR. Systemic risk
posed by the Triffin dilemma would magnify the benefits of O-SDRs by potentially lowering
precautionary reserve accumulation and reducing pressure on the BOP of existing and emerging
reserve issuers. Higher potential demand for precautionary instruments could also strengthen
interest in use of the O-SDR as a financing instrument. If the transition toward a multipolar system is
more volatile, the M-SDR could enhance stability by facilitating a shift to holdings in multiple
currencies with reduced volatility in demand for any particular currency.
45 Similarly, if currency
fluctuations were to become more pronounced in such an environment, the U-SDR could provide a
more stable common standard for transactions.
55. A radically reformed SDR could conceivably serve as a global currency. A radical
redesign of the IMS could introduce the SDR as genuine new currency—an “outside” money. The
design of such a system is beyond the scope of this paper, but consideration would need to be
given to issuance rules or modalities, such as the appropriate balance between rules and discretion
and how elastic supply would be. For example, issuance could be limited to episodes of global stress
(improving global liquidity provision). The SDR could alternatively have a broader role as a global
risk-free asset such that the issuer’s possibly discretionary supply function aims to manage global
liquidity beyond acute situations (thus reducing demand for traditional reserve currencies) or
possibly in trade (facilitating more symmetric external adjustment). The range of users could vary:
recipients could be limited to current prescribed holders, expanded to include private systemicallyimportant global institutions or platforms, or made universally accessible.46 To help establish
credibility and stability, the currency could potentially be backed by the membership of the
institution issuing the currency or by the institution’s own assets, though other options would need
to be explored.
56. There would be many practical and economic limits to the reach of the SDR. A key
question is to what extent the backing available would be a binding constraint to the quantity of
SDR issuance. Extending the uses and users of the SDR would require changes to the AoAs, and it is
not even clear whether widespread use would be desirable. For example, backing the SDR carries
exchange rate and interest rate risks ultimately borne by fiscal authorities, while individual countries’
public debt sustainability could be influenced by the extent of SDR liquidity provision. Furthermore,
unless the world moves closer to an optimal currency area, “SDR-ization” could reduce monetary
policy autonomy for individual countries and render exchange rate adjustment less effective. While
this would present similar problems to those currently faced by countries constrained by U.S.

44 If the account accepted deposits at any time, participants could deposit assets denominated in currencies that
were expected to depreciate in the short term, exposing the account to potential valuation losses.
45 Some investors with long horizons may already view the M-SDR as a way to reduce uncertainties presented by a
multipolar future since other hedges may not be as suitable over long time spans.

46 Some central banks are reconsidering offering universal access by offering direct deposit accounts to the public
(Bordo and Levin, 2017; Bech and Garrat, 2017). Universal access could similarly entail allowing anyone to make
deposits directly with, for example, the IMF in one of the reserve currencies in exchange for an account denominated
in SDRs and redeemable in any of its constituent currencies.
CONSIDERATIONS ON THE ROLE OF THE SDR
34 INTERNATIONAL MONETARY FUND
monetary policy, it has the advantage that the policy rule for SDR issuance could be more
responsive to the global cyclical position rather than that of one country.
B. Cryptocurrencies and Distributed Ledger Technologies
57. Technological innovation in the financial sector could affect cross-border
transactions. Many fintech innovations have the potential to alter the financial sector landscape (He
and others, 2016; He and others, 2017). For instance, DLTs (Box 5) can be applied to various
processes in cross-border payments, lowering back-office and compliance costs and potentially
boosting international financial flows. While DLT-based solutions could potentially offer significant
savings, they currently require conversion of fiat money to electronic ‘tokens’ for payments.
Cryptocurrencies could facilitate the transformation of cross-border payments toward DLT-based
systems. Cryptocurrencies issued by central banks (CBCCs) might be more trusted and potentially
address some shortcomings of private cryptocurrencies,47 for example by providing a stable link to
fiat money.

58. Although technological outcomes are very difficult to predict, such innovations might
influence the IMS and alter the assessment of the role of the SDR. For example, more efficient
payment systems could overcome inertial forces that support incumbent currencies, potentially
speeding up transitions between existing and any new reserve assets. Alternatively, if technological
change makes economies of scale less important, this might increase the number of reserve
currencies the IMS can accommodate, with a possible shift toward currencies with better payment
platforms. Fintech and DLTs could also boost interconnectedness, aggravating susceptibility to
spillovers and swings in capital flows (amid financial stability concerns brought about by other
fintech developments). Therefore, fintech and DLTs could amplify the weaknesses of the IMS
discussed earlier and change assessments on the role of the SDR.

47 He and others (2016) argue that, in their current form, cryptocurrencies’ high price volatility curtails their reliability
as a store of value, that their small acceptance network restricts their use as a medium of exchange, and that there is
limited evidence of their use as a unit of account independent of fiat money.

CONSIDERATIONS ON THE ROLE OF THE SDR
INTERNATIONAL MONETARY FUND 35

Box 5. Distributed Ledger Technologies and Cryptocurrencies
DLTs provide the platforms for cryptocurrencies and promise a range of other improvements in commerce,
yet introduce risks. They present challenges and opportunities for central banks.
DLTs underpin cryptocurrencies, one of many types of Virtual Currency (VC). VCs are digital
representations of value, issued by private developers and denominated in their own unit of account
(rather than in any existing fiat currency). Among various types of VCs, decentralized VCs (referred to as
cryptocurrencies) have recently gained prominence. They rely on DLTs and use techniques from
cryptography for payment processing, with participants typically rewarded in newly minted ‘currency’ for
verifying and validating transactions. DLTs are the protocols and infrastructure that allow computers to
validate transactions and update records in a synchronized way across a network. Distributed databases
maintained by a master administrator and duplicated across a network are not new, but DLT systems can
function without a centralized authority. Blockchain is one form of DLT and powers the Bitcoin network
and cryptocurrency, whose market capitalization exceeds half of all cryptocurrencies.1 Bitcoin’s use as a
medium of exchange has grown rapidly, but its value has been volatile, questioning its success as a
medium of exchange or store of value.
Box 5. Distributed Ledger Technologies and Cryptocurrencies (concluded)
Private cryptocurrencies present challenges to financial stability and macroeconomic management.
Private cryptocurrencies could complicate functioning of central banks by creating an alternative to official
fiat money and thus eroding the monetary base. They pose unknown risks to financial stability, especially
in times of stress, given their short track record, lack of public sector backing, and large swings in valuation
on account of unknown and in some cases rigid supply rules. DLTs might make circumventing exchange or
capital controls easier (further complicating attempts to manage the economy in the event of shocks).
Given their pseudo-anonymous nature, private cryptocurrencies can also serve as a vehicle for money
laundering and terrorist financing. These risks may be modest unless private cryptocurrencies and more
generally DLTs become widespread (He and others, 2016).
DLTs can enable other institutional improvements affecting cross-border flows. Smart contracts,
whose terms are executed by a computer, might enable parties to trade internationally without
intermediaries and with reduced risks of noncompliance, delay, or default. DLTs could also boost trade by
improving information (like tariff codes, credit history, and sanitary certificates). Technology startups
already offer cross-border payments that include exchanges between Bitcoin and local currencies. He and
others (2017) discuss how a DLT-based hub-and-spoke payments network could become an efficient
alternative to the traditional system based on correspondence banking. DLTs might promote financial
inclusion by lowering the execution and compliance costs of remittances, while a consortium is building a
DLT platform for trade finance aimed at small businesses.
Central banks are investigating if central bank cryptocurrencies (CBCC) could improve their
functions (He and others, 2017).
• For domestic payments systems, the Bank of Canada conducted an exercise where a limited
number of wholesale market participants pledge cash in exchange for a CBDC (Cad-Coin)
redeemable at par, while the Monetary Authority of Singapore introduced SGD-on-ledger for the
interbank market (MAS, 2017). However, some have questioned whether touted improvements in
monetary operations would be worth the additional expenditure and risk relative to other
CONSIDERATIONS ON THE ROLE OF THE SDR

36 INTERNATIONAL MONETARY FUND

59. New technologies could help kick start broader adoption of the SDR if more
fundamental challenges facing the SDR can be overcome. While the use of the SDR is currently
constrained by political and economic challenges rather than by technology, more work is needed
to assess how fintech could help to overcome initial market development. For example, could basing
the M-SDR on an alternative payment or settlement system that does not require scale economies
help the M-SDR overcome illiquidity and other constraints?
48 Or, if the SDR were to serve as a global
currency—along the lines of a radically transformed role of the SDR discussed in paragraph 55—
what additional benefits might derive from an O-SDR issued as a digital token? How might a DLTbased payments system affect the relationship between CBCCs and a digital SDR?
VI. ISSUES FOR DISCUSSION
60. Directors may wish to address the following questions:
• Do Directors see a potentially meaningful role for the O-SDR in addressing identified gaps in the
IMS and the GFSN? If so, what avenues for expanding the role of the O-SDR would Directors find
most promising? How do Directors assess the concerns related to moral hazard and targeting
SDR allocations to countries with more liquidity constraints?
• Do Directors see a role for the M-SDR in aiding external adjustment and reducing excess reserve
accumulation? Can the technical and institutional challenges highlighted in the paper be
overcome with official support?
• Do Directors see a case for a supporting role for the U-SDR?

48 Market participants may also see opportunity in exploiting the relative stability and neutrality of the SDR by
offering private cryptocurrencies linked to the SDR. There are already cryptocurrencies with purported yet tenuous
links to the SDR. The IMF has not trademarked the SDR, and does not comment on such initiatives.
technological investments, for example in real-time payments systems (Quarles, 2017; Engert and
Fung, 2017).
• If issued for broader retail banking, CBCCs may expand the monetary policy toolkit because they
would be part of the monetary base and, like reserves and unlike cash, can have (possibly
negative) interest rates. However, central banks could alternatively consider issuing digital
currency through publicly available accounts (as done in Ecuador) rather than as tokens using
DLTs (Bordo and Levin, 2017). The Bank of Sweden is yet to make its choice for the eKrona.
• DLTs might streamline regional cross-border interbank systems that facilitate payment in regional
or local currencies, as considered in a pilot by the Central Bank of Brazil and some of its neighbors
(Burgos, Filho, Suares, and Almeida, 2017). This could be a step toward widespread use of DLTs or
specifically CBCCs for cross-border commerce.
1/ At end-December 2017, cryptocurrencies’ market capitalization was approximately $600 billion (Bitcoin’s share
exceeded one third and was approximately double M0 in the United Kingdom). At the start of 2017, market
capitalization was less than $20 billion, reflecting explosive yet volatile growth in many cryptocurrency prices
throughout the year. By one estimate, the number of daily transactions was approximately 1½ million and is well short
of the approximately 7 million mobile payments using M-pesa (Bech and Garrat, 2017; bitinfocharts.com;
coinmarketcap.com; https://coinmetrics.io/charts/).
CONSIDERATIONS ON THE ROLE OF THE SDR
INTERNATIONAL MONETARY FUND 37
• Do Directors see merit in broader work on how economic and technological developments can
shape the IMS, including the role of the SDR in the IMS in light of these developments?
CONSIDERATIONS ON THE ROLE OF THE SDR
38 INTERNATIONAL MONETARY FUND
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