As provided by the existing arrangements SDRs which are issued by the International Monetary Fund (IMF) to members that are participants in the SDR Department (all members of the IMF at present), concerning each country’s reserved seat at the IMF, to satisfy the world’s long-term needs for additional reserve assets. (Under Article VIII.7 of the amended Articles of Agreement, they should be made “the principal reserve asset in the present international monetary system)”. It could be exchanged among different participants and in between them and the IMF and other selected holders, in particular international financial institutions such as the World Bank and the Bank for International Settlements. They could not be held by the individual private parties. Thus, to be inflationary in nature they must increase the world aggregate demand by stimulating the creation of domestic credit much greater than it would have taken place in their absence.
The mechanics of SDR creation are concerning their potential to facilitate inflation. SDRs are created by a Fund decision and are credited to the member countries in proportion to each country’s reserved seat at the IMF. The allocation doesn’t have any monetary effect, but simply providing participants’ monetary authorities with an add on the contingent claim on the respective SDR Department participants/contingent, since the use of SDRs under the designation mechanism required a balance of payments or need of earlier reserve position under (Article XIX.3). Such creation doesn’t by itself create a demand for goods and services.
A country utilizes its SDRs by exchanging them with another nation holder for a “freely usable currency”. In this practice, it simply means the overwhelmingly U.S. dollars or euros, although other currencies may be used, and the list may further grow shortly, as soon as more currencies become more widely used and traded internationally in next upcoming years. If dollars or euros are provided by other countries than the United States or a member of the Eurozone, there will not be any monetary effect; these foreign exchange reserves will simply be transferred from one country to another. If the United States is asked to provide the dollars, there is in the first stage no credit creation by their implementing agency, the Treasury’s Exchange Stabilization Fund (ESF). If only the ESF lacks sufficient dollars it will “sell” the SDRs to the central bank in exchange for a Federal Reserve credit, thus increasing their money supply in the first stage.
We exactly do not know how the governments would respond to regular and significant allocations of the SDRs. And of course, the governments would respond in very different ways. For example, the United States, Canada, Japan, and the countries of western Europe, presently joined by China, would likely not respond in any manner to all such allocations, since for the last recent years the level of international reserves has not significantly influenced the macroeconomic policies of such countries. Additional reserves in the form of SDRs are not necessarily to provoke these countries to do change their monetary policies, neither are they sufficient to provoke such a change.
