IMF Economists Lament Dollar-Based Financial System

The world should try to mitigate flaws in the dollar-based global monetary system by reducing demand for dollar reserves and exploring alternative reserve assets, a group of economists from the IMF said Wednesday.

The economists said the crisis had "brought to the fore" long-standing concerns about a system based on a single core currency issued by one country.

The U.S. was under pressure to run large current account deficits to supply the world with wanted dollar assets, they said, with no effective discipline on the U.S. or countries like China that have big external surpluses to adjust their policies.

The report was not endorsed by the IMF, but comes amid renewed global dissatisfaction with the dollar's role in the world economic system.

The IMF economists said the crisis highlighted the "scale and volatility of global capital flows" that led countries to accumulate reserves to protect them against a sudden reversal in capital.

But it also renewed questions about "anchoring the international monetary system on one country's currency"—the dollar—"given the origins of this crisis in the U.S. heart of the global financial system."

They said the current system was "something of a non-system" because some economies maintained floating exchange rates while others pegged their currencies to the dollar.

The group proposed alternatives, such as helping create private-sector insurance-type markets to provide funds when needed and an enhanced role for the IMF in providing reliable access to finance.

The IMF has already taken steps in this direction through the creation of a flexible credit line for well-run emerging economies. But the fund's resources would have to be greatly increased to enable it to act as a credible lender of last resort for large economies.

The economists said reducing demand for dollar reserves would be only part of the solution. They said the world would also have to examine alternatives to the dollar as the dominant reserve asset.