Reforming the Global Reserve Regime: The Role of a Substitution Account


  • *The author is grateful for the comments and suggestions made by two anonymous referees, by Princeton colleagues, especially Alan Blinder, and by participants in a symposium on the future of the international monetary system held at the IMF on 15 December 2009, especially for questions posed by Edwin (Ted) Truman, and for comments by Fred Bergsten. The author, however, is solely responsible for the contents of this paper.

Peter B. Kenen
Department of Economics
Princeton University
NJ 0844


The governor of China's central bank recently revived a proposal for the creation of a ‘substitution account’, managed by the International Monetary Fund (IMF), into which central banks and governments could deposit dollar reserves in exchange for claims denominated in Special Drawing Rights (SDRs), the Fund's quasi-currency. This paper summarizes simulations that measure the potential cost of such an arrangement to the United States were it to guarantee the solvency of the account. The simulations show that those costs would be small relative to the size of US external assets and of the US economy. The paper also shows how the costs could be shared with the depositors. Creation of a substitution account could make the SDRs the principal reserve asset in the international monetary system, achieving a major reform of the reserve regime and enhancing the role of the International Monetary Fund.