IMF suggests, over time, a global currency, called for example, "Bancor" in honor of Keynes.Submitted by go213mph on Mon, 08/20/2012 - 21:27
From IMF policy directive, April, 2010
A sui generis Global Currency
From SDR to bancor. A limitation of the SDR as discussed previously is that it is not a currency. Both the SDR and SDR-denominated instruments need to be converted eventually to a national currency for most payments or interventions in foreign exchange markets, which adds to cumbersome use in transactions. And though an SDR-based system would move away from a dominant national currency, the SDR’s value remains heavily linked to the conditions and performance of the major component countries.
A more ambitious reform option would be to build on the previous ideas and develop, over time, a global currency. Called, for example, bancor in honor of Keynes, such a currency could be used as a medium of exchange—an “outside money” in contrast to the SDR which remains
an “inside money”.
Common versus parallel currency. One option is for bancor to be adopted by fiat as a common currency (like the euro was), an approach that would result immediately in widespread use and eliminate exchange rate volatility among adopters (comparable, for instance, to Cooper 1984, 2006 and the Economist, 1988). A somewhat less ambitious (and more realistic) option would be for bancor to circulate alongside national currencies, though it would need to be adopted by fiat by at least some (not necessarily systemic) countries in order for an exchange market to develop.
Caveats and pre-conditions. Absent significant monetary instability or an injunction for use of bancor for the making of an important set of payments (e.g. payment of taxes), surmounting the barriers to wide acceptance would be a key and perhaps prohibitive challenge.
Moreover, an independent monetary policy constitutes an important instrument for adjustment when economies do not form an optimal currency area with others. Adoption of a common currency could limit the scope for adjustment to shocks, and developing alternative
adjustment mechanisms would be a pre-condition for adoption (e.g. greater flexibility of labor markets) as would mechanisms for fiscal discipline and cooperation. Since a system with a few currencies competing alongside one another has built in safety valves (in terms of checks on inflation, for instance; see Rogoff, 2001), it would be essential to construct governance arrangements that ensure accountability of the bancor-issuing institution while assuring its independence. These arrangements would also need to be sufficiently flexible and robust to accommodate differences among adopting members.
These considerations and costs—important as they are—would need to be weighed against the benefits of using a currency like bancor.
Why bancor? A global currency, bancor, issued by a global central bank
would be designed as a stable store of value that is not tied
exclusively to the conditions of any particular economy. As trade and finance continue to grow rapidly and global integration increases, the importance of this broader perspective is expected to continue growing.
Nominal anchor. As a stable store of value, bancor could serve as a global nominal anchor. The variability of traded goods prices that is currently related to exchange rate volatility would be reduced. By not being tied as tightly as the SDR to the conditions of a particular economy or a group of economies, bancor could provide
greater monetary stability, especially since key central banks retain monetary control under an SDR-based system and their respective economies and currencies would be expected to face episodic stresses and volatility (such as higher inflation or deflation).
Risk-free asset. Once liquid markets for bancor-denominated instruments exist and bancor-denominated transactions are at a par with or exceed transactions in other currencies (i.e., in a bancor-based system), bancor-denominated debt of the sovereign with the highest credit rating could serve as the global risk-free asset, off of which all risky assets are priced. The risk-free asset would be less tied to the credit ratings and inflation outlook of the largest economies, and would therefore be subject to less volatility and dependence on their specific circumstances than the SDR-based system.
Lender of last resort.
The global central bank could serve as a lender of last resort,
providing needed systemic liquidity in the event of adverse shocks and more automatically than at present. Such liquidity was provided in the most recent crisis mainly by the U.S. Federal Reserve, which however may not always provide such liquidity.
Adjustment. If bancor were to circulate as a common currency, then current account imbalances among the adopting economies would reflect structural rather than monetary considerations. Instead, if bancor were to circulate as a parallel currency but in a dominant role in place of the U.S. dollar, then as in the SDR-based system described above, current account imbalances that reflect today’s situation—namely, surplus countries pegging to bancor (the dominant currency in place of the U.S.dollar) with deficit countries floating against it—would adjust more symmetrically, and perhaps more automatically, than the current or SDR-based systems since the deficit currencies would be expected to depreciate against bancor.