International Reserve Diversification

Abstract

Central bank reserves have increased at an extraordinary pace and to unprecedented levels. The high concentration of reserve holdings by currency exposes the international monetary system to significant idiosyncratic risks and represents a source of systemic risk for overall international economic and monetary stability. The international monetary system would therefore be better off adopting greater currency diversification. This would also be a more adequate representation of the increasing diversification of the international economy and in particular the rising economic importance of emerging markets. The present note proposes a pragmatic approach based on an international reserve diversification fund to promote the gradual adoption of emerging markets currencies in central bank international reserve portfolios as a transition framework towards a multiple currency system. Such fund would also respond directly to recent proposals by the Chinese and Russian authorities to establish greater reserve currency diversification and by France to promote the internationalisation of emerging markets currencies. Agreement on or giving further considerations to such fund is seen as an important response to emerging markets concerns about the stability of the system and a possible critical deliverable for France’s G20 presidency.

JEL classification: E58 ; F31 ; F33