Special Drawing Rights (SDR) & Optimum Currency Area (OCA)

Prepared by :Prathmesh Shitole

Piyush Kumar PatidarMBA (IB) 3rd Sem 2013-2015

ContentsSpecial Drawing Right (SDR)What is SDR?Why was SDR created?Uses of SDRSDR valuationSDR INTEREST rateLimitation of  SDR

Optimum Currency Area (OCA)Theory of OCACriteria of OCABENEFITS & COST TO HAVE OCA

What is SDR?The SDR is an international reserve asset, created by

the IMF in 1969.

SDRs are allocated to member countries in proportion to their IMF quotas.

Also called paper gold, as it is not backed by any currency or precious metal.

Used only among governments of member countries and IMF for balance Of payments settlements.

Why was SDR created?

To support the Bretton Woods fixed exchange rate system.

The dominant constituents of international reserves are:

Government or central bank holdings of gold Widely accepted foreign currencies (USD)

Inadequacy of these two key reserve assets , led to creation of a new international reserve asset under the auspices of the IMF.

Uses of SDR

For balance of payments settlements among the members

Used for transactions with fund for e.g.. By paying the reserve tranche.

SDR denominated bank deposits and loans have been offered in private financial markets.

SDR ValuationThe value of the SDR initially defined as

0.888671 grams of fine gold = one U.S. dollar.

After the collapse of the Bretton Woods system in1973, SDR was redefined as a basket of currencies

Basket consists of: Euro Japanese yen Pound sterling  U.S. dollar

SDR INTEREST RATEThe SDR interest rate provides the basis for

calculating:Interest charged to members on regular (non-

concessional)IMF loansInterest paid and charged to members on their SDR

holdings and charged on their SDR allocations.Interest paid to members on a portion of their quota

subscriptions.The SDR interest rate is determined weekly.Is based on a weighted average of representative

interest rates on short-term debt in the money markets of the SDR basket currencies.

LIMITATION OF SDR

Dollar centered system: It gives too much importance to USD.

Deficit of USD.

Optimum Currency Area (OCA)

In Economics OCA also known as Optimal

Currency Region (OCR).Definition : is Geographical region in which it

would maximize economic efficiency to have entire region share a single currency.

The theory is used often to argue whether or not a certain region is ready to become a currency union, which is one the final step of economic integration.

Theory of OCAWas pioneered by economist Robert Mundell

as originator of the idea, but others point to earlier work done in the area by Abba Lerner.

Mundell stated “economic efficiency would

be maximized in a geographical region if the

region all shared a single currency”.

Criteria of OCAOpenness

Diverse production : wide range of products

& similar production structure

Mobile Labor

Homogeneity of preferences

BENEFITS & COST TO HAVE OCABENEFITSReduce transaction costsBargaining powerMore intra TradeEconomies of scaleRemoval of foreign exchange riskFixed exchange rate

COSTSUnitary monetary policy Constraint on national fiscal policy

Thank You!!