Intraregional Cross‐Holding of Reserve Currencies: A Proposal for Asia to Deal with the Global Reserve Risks

Abstract

Economists have put forward various proposals to deal with the growing risks of the global reserve currency system. In this paper we recommend that Asian economies hold each other's currencies as part of their foreign reserves. Different from crisis‐fighting currency swap arrangements or crisis‐rescuing fund mechanisms, this mechanism means that reserves would be held, with a regular arrangement in place and on an ongoing basis. We propose that the global reserve system should be pushed in the direction of diversification, which could be a transitional step toward a new single reserve system. This mechanism would not necessitate any currency being a globally accepted reserve currency but would mean that every currency carried some weight in the reserve system. Establishment of such a system would require significant development of regional bond markets and facilitation of macroeconomic surveillance among the economies.

Keywords: Asia, cross‐holding of regional currencies, global reserve system, US dollar

JEL Classification: F330, F360, F420