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I understand that IMF is currently contemplating printing money via new allocation of SDR, and thereby attempting to help increase global liquidity in period after covid. What impact, if any, can large amount of such allocations have on currencies of various member countries? What if this amount was larger?

For example - (a) Will printing more SDR and distributing in world means indirectly more USD has been printed as SDR has about 40% USD. Will this devalue dollar?

(b) Will this inflate economies globally? Does it have disproportionate impact on inflation in economies whose currencies are in SDR basket?

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  • $\begingroup$ US$650 billion may be a large number, but it is not unlimited. The primary purpose is liquidity. $\endgroup$
    – Henry
    Jul 2 at 10:53
  • $\begingroup$ @Henry 7 agreed, that 650Bn is limited but i wanted a more academic understanding of what happens if this was a much bigger amount and how will it impact exchange rates of member countries and dollar $\endgroup$
    – toing
    Jul 2 at 18:47
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IMF does not 'print money' by allocation of special drawing rights (SDR). SDR is not technically considered currency or money, as it does not serve as a general accepted medium of exchange. Rather SDR is considered to be 'reserve asset' (see IMF explainer of SDR here).

In turn, the SDR is convertible in terms of the basked currencies (US dollar, euro, Chinese yuan, Japanese yen, British pound sterling).

Clearly, this directly does not lead to expansion of money supply of the currencies in the SDR basket ceteris paribus. If anything more demand for money (as these SDRs are converted) should be deflationary not inflationary ceteris paribus. However, of course, central banks could respond to this extra demand for USD by allowing USD money supply to expand, but that is not guaranteed to happen, it will be a policy choice.

Interestingly, research shows SDR can have a positive (albeit small) effect on inflation in country that receives these SDRs (see Chițu 2020). But since you are interested in the effect of SDR on inflation in countries to which SDR is pegged, this is just an interesting tidbit on a side.

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  • $\begingroup$ Can you please expand on deflationary aspect? So far i was thinking that more SDR is indirect way of printing more USD and other currencies. Does SDR printing means, USD can now be drawn out from system in exchange for SDR and therefore its de-flanationary? Will such countries like US be supportive of such a move? Is impact of them overall positive or negative? $\endgroup$
    – toing
    Jul 5 at 5:04
  • $\begingroup$ @toing 1. SDR does not involve printing of anything. It’s all fully digital and SDR is not a currency again. 2. SDR allows those countries that get the SDR to do one of the filling A) exchange it for the basked currencies B) keep it as a reserve. The A option will be ceteris paribus deflationary, B option will be inflationary but in the country that received SDR not in other countries that are part of the basket. 3. I don’t know of any survey of which countries are in favor of that. 4. Impact on what? It’s beyond scope of a comment to list any potential impact this can have $\endgroup$
    – 1muflon1
    Jul 5 at 23:42

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