Friday, October 2, 2009

Central Banks Continue to Reduce Their Share of Dollar Reserves


The usual response to worries that US macroeconomic profligacy will eventually end the dollar’s privileged position as lead international currency has always been that no asset constitutes a credible alternative for central banks to hold in their portfolios. I have argued that, since 1999, the euro has constituted a credible alternative. Based on econometric estimates of the determinants of central banks’ reserve holdings in research with Menzie Chinn, we have even gone so far as to report simulations that show the euro overtaking the dollar by 2022. Many, like Ted Truman, consider such speculation exaggerated. They may be right.

But the euro is not the only alternative to the dollar. The yen, pound and Swiss franc remain viable alternatives for national authorities to put some of their reserves. Furthermore, 2009 has seen the resurrection of two international reserve assets that had previously been written off as dead: the SDR and gold. My forecast is that we are gradually moving from the dollar standard to a global monetary system that features multiple reserve assets

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