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 članak: 3 od 18
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2022, vol. 56, br. 3, str. 763-796
Rat u Ukrajini i promene globalnog ekonomskog sistema
aBeogradska akademija poslovnih i umetničkih strukovnih studija (BAPUSS), Beograd
bUniverzitet u Beogradu, Fakultet bezbednosti

e-adresabojan.dimitrijevic@bpa.edu.rs, milenko.dzeletovic@gmail.com
Ključne reči: globalni ekonomski sistem; reforma; Ukrajina; rat; dolar
Sažetak
Dugogodišnja neodgovorna politika SAD s prekomernim štampanjem dolara, pojačana krizom COVID-19 i ratom u Ukrajini, dovela je do velikog javnog duga i rasta inflacije u SAD, što u značajnoj meri ugrožava poziciju dolara kao svetske rezervne valute. Najnoviji izazov dolaru uputili su Rusija, Kina i zemlje BRIKS-a. Rad upravo analizira posledice rata u Ukrajini, rat sankcijama između Rusije i Zapada, poziciju dolara kao svetske rezervne valute i slabosti međunarodnog finansijsko-monetarnog sistema koje rađaju finansijsku nestabilnost, česte krize i rastuću nejednakost. Poseban naglasak stavljen je na moguće reforme međunarodnih finansija i alternativne predloge za novu rezervnu valutu i efikasniji rad globalnih ekonomskih institucija (MMF) u cilju veće jednakosti i bržeg privrednog rasta.

# Introduction

After unsuccessful attempts to reach agreement about strategic peace guarantees with the USA and NATO, Russia began its special military operation in Ukraine on 24 February 2022, with the basic goals as follows: protection of pro-Russian population in Donbas, demilitarization and denazification д of Ukraine and guarantees that this country will not be a member of NATO. Immediately afterwards, the USA, the European Union and the countries of the collective West imposed a set of sanctions on the Russian Federation, while in August 2022 the EU introduced the seventh package of economic sanctions. The sanctions refer to the sphere of economy, finance, international payment transactions, and movement of goods, capital, services, energy and traffic. These are the most comprehensive sanctions in the world’s economic history. Russia responded by reciprocal measures, asymmetrically, and so far, has managed to avoid the collapse of the economic and financial system. As a matter of fact, the sanctions can be said to have affected on a large scale the European Union that is in store for a very cold winter, heating difficulties and decline in the economic activity due to the dependence on the Russian gas. The most affected is the economy of Germany, although consequences can be felt in East European countries, as well as Italy, France and Great Britain.

Simultaneously with the energy crisis and economic problems as a consequence of the sanctions war between Russia and the West, the world is facing the problems of exiting the COVID-19 crisis (2020–2022), energy transition towards the Green Agenda (which, independently of the Ukraine war, led to the increase in the prices of gas, oil, coil and electricity), inflation problems (due to excessive money printing during the pandemic both in the USA and inside the EU), and even hits of stagflation that was last witnessed in the 1970s, because inflation increase is accompanied by slower economic activity, revision of the expected downward trend of GDP1 and the possibility of concurrent production decline and record-high inflation of 10% or more in the EU member countries and in the USA2. The US Federal Reserve, the Bank of England and the European Central Bank (ECB) have already increased the referential interest rates in their fight against inflation3. This led to a decrease in the prices of securities and a gradual increase in the debt burden for some of the non-Western countries (Argentina, Nigeria, Somalia, Pakistan), while it will further contribute to the slowing down of economic activity. This time, national economies are not permitted to print money and implement an expansive monetary-fiscal policy for encouraging economic growth, which will deepen the problems encountered by the world economy on the whole.

The first hints of economic costs are measured in thousand billion euros or dollars:

• Preliminary estimates indicate that costs of the destroyed infrastructure in Ukraine have reached more than $600 billion, with the tendency of reaching as many as 1,000 billion during the war; • the IMF announced the decline in Ukraine’s GDP by 40% and the decline in Russia’s GDP by 20% (about$400 billion), with substantial unknown military costs suffered by Russia and Ukraine; Ukraine has already received international help of more than $60 billion, and it needs further$5 billion per month to cover military costs and the budget deficit;

• Due to the sanctions, Russia’s level of FX reserves of $600 billion has been frozen, including its large property abroad; • The slower growth of the European countries and Japan currently means a decrease of 1-1.5% in GDP, which is more than$300 billion, with the tendency of further slowing down of economic activity;

• The drop in the US stock exchanges exceeded the amount of $2,000 billion, while certain increase in interest rates will only increase these losses; • The level of world debts has reached the dizzying amount of$300,000 billion, and the growth increase in interest rates of only one percent increases the world debt burden by $3,000 billion; • Currently it is difficult to calculate the losses caused by the reduced delivery of Russian gas to the EU, but it will amount to more than$100 billion on a yearly basis, along with uncertain length and intensity;

• Chinese economy (formerly the engine of the world development) is substantially slower, from the previous high rates of over 8% dropping to 5.5%, with the tendency of further slowing down to 4.5% because of the lockdown in large cities caused by the COVID-19 pandemic (Shanghai); such unrealized growth exceeds $800 billion. One of the most important measures introduced by Russia as a counter-sanction was its request for the payment of Russian gas in the Russian ruble by the countries that were declared as Russian enemies. Apart from a series of other measures in the financial system, contributing to the stabilization of Russian economy and the prevention of economic Blitzkrieg4, this measure raised the long-imposed question about the position of the dollar as a world reserve currency and the need for a radical reform of the international financial system that would lead to the disappearance of the US dominance and to the greater stability of international finance. That is why in the paper below we will analyze the functioning of the Bretton Woods system of international finance and its abolishment, the growth of the dollar as the world reserve currency, the problem with the dollar abuse and the difficulties encountered by the international financial-monetary system, costs and benefits of doing away with the predominant position of the dollar and proposals for the reform of the international financial system. # Bretton Woods financial-monetary system During 1944 (before the end of World War II), the victorious countries met in Bretton Woods (USA) and negotiated the foundations of the international financial-monetary system. In creating the system, the decisive advantage went in favour of the proposal by Harry Dexter White, senior U.S. Treasury department official, and, as a result of the agreement, the International Monetary Fund and the World Bank (Bretton Woods twins) were founded. The IMF’s task was to supervise the system of fixed foreign currency rates of exchange and to apply short-term funds and loans, where applicable, to help the countries experiencing unstable balance of payments in financing and regaining balance. The World Bank was supposed to finance the projects of capital and infrastructural importance substantially contributing to the economic growth of the developing countries. The dollar formally became the world reserve currency (which was the status already gained in the 1930s)5 due to the fact that the USA became the first economic world power and the strongest economy in the world, that the dollar was a generally accepted payment instrument in international economic relations and that the USA held 60% of the world gold reserves (Stakić, 2012). The dollar was related to gold by the fixed rate of exchange of$35 for one fine ounce of gold6, with the possibility of its conversion to gold, while all other world currencies were related to the dollar by fixed rates of exchange. The US Federal Reserve was obliged to convert dollars to gold only in transactions with central banks of other countries, but not with participants in private capital markets. The countries were obliged to maintain convertibility of their respective currencies towards the dollar in current accounts. This was a modified version of the gold standard that was abandoned after the Great Depression in 1929–1933.

At the same time, there was an alternative proposal for the formation of the international economic system presented by famous British economist Keynes, but it was not accepted. Keynes’s proposal included the following (Stakić, 2012):

• formation of a world central bank and a world reserve currency bankor, which would be emitted by the central bank;

• the national rates of exchange would be formed by the bankor, while bankor emission would be performed in line with the needs of international finance and countries participating in transactions;

• it is also necessary to establish an international clearing union that would create international liquidity;

• the goals of the world central bank should be balance of payments equilibrium, full employment, financial stability and price stability;

• the central bank would hold much larger funds than the IMF, with the possibility of intervention and establishment of balance of payments equilibrium; Keynes proposed that those funds should be at the level of one half of the world imports, which would give enormous intervention power to the world central bank formed in this manner;

• the countries with a high foreign trade surplus (China, Germany), which acts in a deflationary manner, would be sanctioned by interest rates paid on the surplus of funds, or stimulated to eliminate it, while the funds collected in this manner could be directed towards development; it is an interest rate of 1% per month and it would prevent a drop in aggregate demand and increasing unemployment.

Thus-formed IMF held small funds for establishing balance of payments equilibrium, while the development requirements of the Third World countries (developing countries and subsequently growing economies) led to great imbalance in the exports and imports that could not be covered by the IMF. For example, the Marshall plan in Europe and Germany had much bigger funds. Nevertheless, in the mid-1950s, the IMF fulfilled its mission with relative success, and the loan system on the quota basis was the foundation of program arrangements. However, the IMF gradually became ever stricter; its missions conditioned financial support by structural adjustment programs and often by economically, socially and politically painful reforms to the Third World countries. The introduction of special drawing rights (SDRs) did not significantly improve international liquidity nor led to overcoming the problem of the dollar as a reserve currency, primarily because the USA was against the increasing role of the SDR.

The system in which the dollar was the world reserve currency brought a number of benefits to the economy of the USA as the emitting country. Those were so-called positive externalities of holding the reserve currency (Cooper, 2009). They include several advantages:

• seigniorage – the emission revenue for the emitting country as the difference between the value of the dollar and its emission costs; the USA can practically free of charge emit the dollar and use it for the purchase of real goods and services of other countries; thus, it takes the real value without any countervalue, which causes inflation in the rest of the world; in that manner, the US Federal Reserve becomes a “machine for producing world inflation”;

• easily covering the budget deficit by emission of securities bought by other countries in the form of FX reserves;

• differences in the interest rate by which the USA lends capital to the developing countries (higher) and the interest rate by which those countries repay their loans (lower), which constitutes specific subsidizing of the US economy;

• increase in employment and profits in the US financial sector;

• the US Federal Reserve monetary and interest policy is adjusted to the needs of the US economy, regardless of the rate of exchange between the dollar and other currencies and needs of other countries participating in international finance, which leads to crises and international economic and financial instability.

The system of fixed foreign currency rates of exchange and modified gold standard initiated a number of other problems related to the deficiency of the dollar as a transactional instrument in international payments, liquidity problems, insufficient quantity of gold, deflationary effect of gold convertibility, inflexibility of monetary and foreign trade policy, difficult adjustments in the regime of fixed foreign currency rates of exchange and to the liberalization of international capital flows and the capital market. The consequence of Bretton Woods system and the dollar as a reserve currency was the constant deficit of the current accounts balance in the USA that is covered by the inflow of cheap capital from the world, while other countries have surpluses and accumulate foreign exchange reserves in dollars. The surplus in the US current account covered the rest of the world, and the US economy was the engine of dynamics in the world consumption and overflow of inflation (Kovačević, 2018; Meltzer, 1991).

Therefore, at the beginning of the 1960s, American economist Robert Trifin wrote several papers analyzing the growing problems with the dollar, which were called Trifin’s paradox7. Namely, due to the need for dollars and world liquidity, as well as the increase in the volume of international trade and exchange, two problems arise: 1) dollar deficiency and deflation, because there is not sufficient gold to cover the growing need for dollars; 2) increasing deficit in the US foreign trade accounts due to the fixed foreign rate of exchange (Kovačević, 2018). The US high trade deficit and increasing emission of dollars without coverage in gold undermined the trust in the dollar as the reserve currency and increased benefits to the US trade. Furthermore, the increase in the US budget deficit and public debt leads to the inflow of capital to the USA at quite low interest rates and significant benefits to the US economy, but they further destroy the position of the dollar. Like Keynes, Trifin also advocated for an international central bank and a different emission of the world reserve currency, while abandoning fixed rates of exchange and gold convertibility (Tobin, 1978). That marks the beginning of the abandonment of Bretton Woods system and the introduction of flexible foreign rates of exchange.

# Abandoning Bretton Woods system of fixed foreign currency rates of exchange and gold convertibility

Bretton Woods international financial system experienced its crisis during and at the end of the 1960s because there were much more dollars than the quantity of gold covering them, while, due to the financing of the Vietnam war, the US budget deficit and the average inflation of about 6% per year additionally raised the question of trust in the dollar and exercised the pressure on changing and abandoning the fixed foreign rate of exchange of the dollar to gold and other currencies to the dollar. Because of a series of pressures, on 15 August 1971 the USA abolished the convertibility of the dollar for gold, and that was the actual end of the Bretton Woods Agreement.

Two dollar devaluations followed (by 8% in 1971 and by 10% in February 1973) and finally, on 19 March 1973, the currencies of most European countries and of Japan abandoned the fixed rate of exchange and adopted the floating one. The USA continued to rule the IMF policy, and after the inflation, stagflation and two oil shocks, the world experienced increasing instability of international financial relations during the 1970s8.

Eminent American economist James Tobin, Nobel Prize winner and Keynesian, pointed out that the international financial system had two key problems (Tobin, 1978). Those were: 1) the matter of the reserve currency liquidity, and 2) the mechanism of balance of payments adjustment. Tobin believed that a flexible foreign rate of exchange was not a solution either, because the key problem refers to capital mobility and the liberalization of the capital market. The development of the capital market proceeds much more rapidly than the liberalization of the labour, goods and services market. With international mobility of capital and the flexible rate of exchange, the Mundell–Fleming model showed that the monetary policy is not autonomous, but it turns into a policy of foreign rate of exchange management, which calls for intensive coordination of international policies, whereas the USA, as a rule, is not ready for it9. Tobin had several proposals for the reform of the financial system with the aim of its bigger stability (Tobin, 1978): 1) create a central bank with one currency and the unified monetary-fiscal policy (Keynes, Trifin), 2) if it is not possible, go for financial segmentation, decentralization and greater autonomy of central banks in the world and their governments; 3) unified tax on financial transactions, proportional to the scope of those transactions, which would be much smaller on common transactions and long-term securities.

Analyzing the problems with the dollar as a reserve currency in the period after the collapse of the Bretton Woods system, Charhour and Valchev state that in the period 1973–2010 the balance deficit of the USA current accounts was about $8,000 billion, while in the same period the USA created FX reserves in the amount of$4,200 billion for the rest of the world (Chahrour, Valchev, 2017). That is how the connection the US consumption → FX reserves increase was formed in the world, while the balance of current accounts was financed by the creation of dollar liquidity. The country holding the reserve currency is able to be infinitely in the trade balance deficit and to make profits on interest arbitration. That interest difference, at which the USA offers the dollar to the rest of the world and at which it pays its obligations on foreign property denominated in dollars, is sometimes 3% and more and is measured in hundred billion dollars (Gourinchas et al., 2010). The yield on the debt, securities and foreign direct investments rose from 1.3% per year in 1973 to about 3.5% in the period until 2009 (Chahrour & Valchev, 2017).

In his works, Stiglitz emphasized several big problems experienced by the international financial system (Stiglitz, 2010; Stiglitz & Greenwald, 2010): 1) high level of global instability due to the volatility of foreign currency rates and unstable capital flows, 2) instability of energy resource prices (primarily of oil) and 3) due to the selection of the growth model mainly based on exports. It caused more than 120 financial crises after 1973, the largest of which was the Great Recession from 2008. D. Rodrik reminds of a series of large currency- financial crises that affected the world starting from 1990s in many countries with growing markets (Rodrik, 2006):

• Tequila crisis in Mexico in 1994–1995;

• Turkey in 1994;

• The 1997 crisis in the Far East countries (South Korea, Singapore, Thailand, the Philippines, Malaysia, Indonesia, Japan), which caused great damage to their economies, except for China and Vietnam10;

• Russia in 1998 (whereas Putin came to power afterwards);

• Brazil in 1999;

• Argentina in 2002.

The crisis, as a rule, affected the countries with flexible foreign rate of exchange and liberalized foreign trade and capital market; those countries experienced abrupt capital flight, speculative attacks of hedge funds11 on domestic currencies, a series of devaluations and destruction of the domestic financial market and the entire system. The economic crises were further enticed by the IMF, following the policy of the Washington Consensus (the IMF – the World Bank – US Treasury Department – Treasury), which insisted on structural adjustments by the model stabilization-privatization-liberalization; in many cases, it only deepened the crisis, along with huge social, economic and political costs to the countries implementing such stabilization policy of the IMF. Stiglitz wrote about it in detail in his criticism of the IMF (Stiglitz, 2011; 2013; 2015)12.

This institution was placed under complete control of the USA, and began sanctioning the countries with the balance of payments deficit, while practically awarding the countries with the surplus and equally contributed to the world instability. The IMF turned into a “civilized debt collector” and, in the event the countries with problems refused the IMF’s recommendations, in the next stage “colour revolutions” or open military interventions of the USA and NATO would follow against the countries that did not accept the standards of neoliberal economy. A direct consequence of frequent crises and international financial instability is an increase in FX reserves of the newly emerging market economies and Third World countries, which are once again denominated in dollars (Bordo & McCauley, 2017a; Bordo & McCauley, 2019). That is how an additional paradox emerges: the position of the dollar as a reserve currency increases financial instability, which calls for the necessary growth of dollar FX reserves in indebted countries! Although the trust in the dollar is weakening, dollar FX reserves are increasing (Kovačević, 2014; Chahrour & Valchev, 2017). Why was there an abrupt increase in FX reserves in dollars after 1990s and the Great Recession? There are several basic reasons:

• 6) a higher level of FX reserves is a supply ensuring easier overcoming of a potential economic crisis, which has been proved by the experience of a number of countries that encountered the crisis; it is self-insurance against a crisis (Rodrik, 2006);

• 7) high FX reserves reduce the risk of the occurrence of a crisis and the probability of the occurrence of a crisis, which substantially reduces possible costs incurred in the event of a crisis;

• 8) if a country has a higher level of FX reserves, it can more easily protect the foreign rate of exchange that is, as a rule, overestimated (e.g., in Serbia), but it is the main nominal anchor that prevents shocks to inflation and financial stability (Obstfeld & Rogoff, 2005; Steiner, 2010);

• 9) globalization and financial liberalization itself and the development of the global financial market has led to an increase in the scope of trading with securities and an increase of FX reserves, even in African countries that have a completely different position from the Far East countries (Rodrik, 2006);

• 10) the IMF’s policy often encourages developing countries to accumulate FX reserves in order to protect themselves more easily from the strict requirements of the structural adjustment programs, which causes further damage and instability to their economies (Stiglitz, 2010; Stiglitz & Greenwald, 2010).

Dani Rodrik has shown that the difference in interest rates at which the developing countries receive capital (higher interest) and at which they place their FX reserves (lower interest) amounts to minimum 1% of GDP, which is a huge amount of funds and a specific insurance premium that is paid for an increase in FX reserves (Rodrik, 2006). If on the other side there are potential costs of the financial crisis 10% or more of the GDP, then such cost can be justified. A simple example shows that the developing countries take money at the interest rate of 10% (for example, $1 billion), and the central bank of that country increases FX reserves by the same amount through the purchase of American securities on which it gains interest of 0.5%. That is how on a yearly basis the transfer of wealth is made to the USA in the amount of$95 million that it can use for its own needs, while the surplus most frequently ends up in the hands of rich individuals and private banks. The increase in FX reserves is particularly characteristic of Asian and Far East countries, which they use to pay their access to the American capital market. This increase in FX reserves, however, reduces global aggregate demand and increases international instability of the financial system.

In order to improve their liquidity in the event of a crisis, vulnerable economies of less developed countries can do three things: 1) increase FX reserves: 2) take loans for the purpose of protecting themselves from crises; 3) reduce short-term loans. Since in the third case, behind indebtment there are powerful debt lobbies in the country and abroad that try to increase borrowing, the politically most simple way of ensuring the country against a crisis is the increase in FX reserves, which has happened since the beginning of the 1970s, and particularly after the 1990s crisis and the Great Recession. Until the beginning of the 1990s, FX reserves were at the level of 3-to-4-month imports, while today they are at the level of eight-month imports (Rodrik, 2006). Their share in GDP also increases, and after 2000 the so-called GG rule followed (after the authors of the proposal, Greenspan and Guidotti)13, according to which the level of FX reserves should correspond to the short-term foreign debt of the given country. Experience shows that all the countries with a higher GG coefficient (the FX reserves/short-term debt ratio) were also more resistant to the crisis (Rodrik, 2006)14.

It should be recalled that the abandonment of the Bretton Woods system in 1973 introduced yet another phenomenon that increased the role of the dollar as the world reserve currency – so-called Petrodollar. The Petrodollar entered the world financial scene in 1973, when the USA and Saudi Arabia agreed to perform oil calculations and trade in US dollars, while in return Saudi Arabia got a large amount of arms and political support of the USA. Saudi Arabia is the most important member of OPEC and the leader in the world oil production, while the USA is the owner of the dollar and the master of international finance. This further strengthened the position of the dollar, which became not only a key trading instrument in international finance, but also a supply of value. With time, the quantity of the Petrodollar rose to more than $6,500 billion, which accounted for about 10% of the world GDP and 40% of the US GDP. At the beginning of the 1990s, over 80% of world FX reserves were held in dollars, and about 80% of international payment transactions was executed in dollars. Although the trust in the dollar is dwindling, particularly after the COVID-19 crisis and the war in Ukraine, according to the data presented by R. Kovačević in 2017 (Kovačević, 2017), there are still 60% of the world’s FX reserves in dollars, and 85% of all foreign currency transactions are executed in dollars. Here are some data illustrating the movement of international FX reserves: • In the period 2000–2013, FX reserves increased by 6 times, and by as many as 11 times in the developing countries; the increase in FX reserves is much higher in growing economies and developing countries than in developed Wester n countries (Kovačević, 2017); • World FX reserves consist of securities, monetary gold and SDRs, out of which 4,3 thousand billion is in low-interest-rate securities of great liquidity and safety; • In 1999, FX reserves accounted for 6%, and in 2009, 15% of the world GDP. The average growth rate of FX reserves is accelerated in all countries; • About 2/3 of the world FX reserves are in less developed countries and growing economies (Asia, China); in these countries, FX reserves accounted for almost 18% of GDP in 2011; • In 2012, the level of world reserves already reached$10.5 thousand billion, out of which China accounted for almost 70% (Kovačević, 2012);

• Serbia as a small open economy has the level of FX reserves of about 30% of GDP, out of which 70% in safe securities.

# Problems of the world financial-monetary system

The most important problem of the world financial-monetary system is dwindling trust in the dollar as the world reserve currency (Eichengreen, 2011), which is further intensified by the acting of the USA after the outbreak of the war in Ukraine (confiscation of Russia’s FX reserves) and Russia’s response to the US and EU sanctions, as well as the requests of BRICS for the creation of a new balance of payments reserve currency.

Instability and imbalance of international finance are manifested in the form of increasing budget deficits and current transaction balances (“twin deficits”), whereas the US public debt has reached 130% of GDP15. The annual US current accounts deficit is $800 billion, with a growing tendency. The second problem is the slow growth of the EU, which has already entered the problem of secular stagnation, while the third problem, which has been present in international relations for years, is the underestimated yuan that generates Chinese surplus of$150 billion per year (Stiglitz, 2010; Stiglitz & Greenwald, 2010).

As for instability of international finance, there are two alternative models, i.e., two explanations (Stiglitz, 2010; Stiglitz & Greenwald, 2010).

The first model starts from the fact that excessive consumption in the USA (high budget deficit, partly because of huge expenditures for the military-industrial complex and military interventions) causes the current balance deficit, which is then financed by cheap inflow of capital from abroad. That is the twin deficit model. However, Stiglitz and Greenwald showed that the current balance deficit increases independently of the budget deficit and that there is no causal-econometric dependence between these two balances.

The second model is the model of savings saturation model, where causality goes from the countries with savings surplus over investments (China and the Far East), so that the funds with foreign direct investments and Petrodollars go towards the USA, where the capital market is deep, wide, safe and high-yielding. Therefore, demand for the dollar is increasing because a) the volume of international trade is increasing; b) the policy of the USA and the IMF encourages larger FX reserves as a warranty from the outbreak of crises, which are exactly the consequence of the economic policy of the above-mentioned subjects. It means that the USA intentionally create instability that causes crises and increasing needs for FX reserves in dollars and American securities. In that model, the US budget deficit is endogenous, while capital inflow is exogenous – the causal factor of growing financial instability, the USA appears as a world consumer in the last instance (affecting global aggregate demand) and as a country with trade deficit in the last instance, while other countries generate surplus that has a deflationary and recessive effect on the overall world economy.

The trust in the dollar as a supply of value is undermined by the US high trade deficit and high public debt, as well as growing inflation that since the outbreak of the war in Ukraine has risen to more than 10% a year, which is a record in the past 40years! What is a possible alternative to the dollar as the world reserve currency? First, the yuan, due to the increasing importance of Chinese economy; second, a type of a synthetic currency such as SDRs, or bankor, which was proposed by great economist Keynes (Cooper, 2009) back in 1944.

That is why here we will briefly explain the role of special drawing rights (SDRs) as a potential synthetic reserve currency created by the IMF as early as the 1960s (Stakić, 2012). The Amendments to the IMF Statute from 1967 introduced special drawing rights (SDRs) with the aim of improving international liquidity and being a more reliable reserve currency than the dollar used to be. The creation of SDRs began in 1969 with the same parity as the dollar. The currency was synthetic because its value was calculated on the basis of the currency basket of 16 countries whose ponders corresponded to the shares in world exports. As of 1981, the currency basked includes only five strongest currencies: the dollar, the German mark, the pound, the yen and the French franc while ponders changed occasionally. However, SDRs were not accepted as a reserve currency because the USA was against them. The emission was rather limited and without any major effect on international liquidity, and SDRs were not accepted as a currency in private transactions either, nor could they be simply converted into other currencies. The scope of SDRs that could be used by the member countries depended on the quota within the IMF funds and was rather limited, insufficient for bridging the balance of payments problems. There are numerous ideas about the reform of SDRs so that they could correspond to their role more efficiently, but we will speak about it in detail in the final chapter.

The world is currently in a type of a stalemate because everyone can perceive the faults of the dollar, wanting to get free from the dependence on the USA because, in line with its political agenda, the USA can easily impose dollar sanctions on any country that is not implementing the US policy. Moreover, the high public debt and growing inflation in the USA do not seem encouraging for dollar reserve holders in less developed countries. The official initiative for the formation of a reserve currency as an alternative to the dollar was also made by BRICS, an increasingly influential international association consisting of Brazil, Russia, India, China and the South African Republic16. Even though BRICS is not an organization of the EU type, but rather like G7, mainly relying on cooperation, Russia and China as the backbone of BRICS addressed a challenge to the USA in the direction of political and economic multipolarity, with the aim of reducing the importance of the dollar and, together with it, the dominant influence of the USA that abuses its position of the country that owns the world reserve currency. Although the share of the dollar in world financial transactions, foreign exchange affairs and reserves is gradually declining (from 80% to 60%), it is still dominant, with no real alternative, in the opinion of many theoreticians (Cooper, Chahrour, Valchev, Kovačević, to name but a few). Nevertheless, the share is growing of bilateral currency arrangements, regional currency agreements and the yuan which, because of the power of Chinese economy, can be a potential alternative in the future.

# Proposals for the reform of the international financial-monetary system

After the Great Recession, in 2009, the United Nations established the UN Expert Commission for the reform of the international financial-monetary system, which was chaired by Nobel Prize winner Stiglitz and which proposed a series of reform steps in the spirit of Keynes’s earlier ideas (Stiglitz, 2010; Stiglitz, & Greenwald, 2010). The reform sees the prerequisites in better global coordination of economic policies and substantially better financial regulation (poor regulation caused the 2008 crisis). The core idea is to emit the world reserve currency that would be proportional to the growth in foreign exchange reserves in the world. In that case, there would be neither inflation nor negative effects on aggregate demand. The countries with the balance of payment problems would receive the sufficient amount of this currency for establishing the balance and stability, while the countries with the surplus would pay the default interest that might be used for the reduction of poverty in the world or of global environmental pollution. Stiglitz believes that, if the countries with the imbalance in foreign trade exchange could automatically use SDRs or bankor, they would not accumulate their FX reserves and thus they would also avoid political conditioning.

Another initiative is the so-called Chiang Mai, named after the city in Thailand where it was presented at the 2000 meeting of the Asian Development Bank with a set of bilateral currency arrangements. In 2010, the idea turned into a multilateral currency agreement of 10 countries of ASEAN plus China, Japan and South Korea, with the fund that first amounted to $120 billion and was then increased to$240 billion. The aim was to overcome more easily currency crises, such as the one from 1997 and to prevent those countries from relying too much on the policy of the IMF and the USA. That is how regional FX reserves and the reserve currency appeared, a type of Asiabankor with the regional reserve fund. That is exactly the decentralization model spoken about and previously proposed by Tobin (Tobin, 1978).

There is an idea regarding SDRs that would enable their acceptance by both private holders and private financial markets, so that it could turn into a real currency with the possibility of convertibility, while the IMF should emit bonds that would be to the benefit of special drawing rights. This idea is similar to Stiglitz’s proposal, with much more easily available credit lines for balancing the member countries’ balances of payments. Unlike Stiglitz, Cooper thinks that the idea is hardly feasible because of a series of practical problems with SDRs, such as SDR emission, difficult acceptability to the private sector, necessary modification of the rules and manner of work of the IMF, where political obstruction might occur (Cooper, 2009). In 2010, the Governor of the Central Bank of China made an initiative for the formation of a type of a substitution account through which central banks could exchange their FX reserves in dollars for SDRs (Cooper, 2009), but also for other currencies with the aim of avoiding the foreign currency risk in the event of abrupt loss of the dollar value in a dramatic scenario.

The euro and the yen cannot replace the dollar as reserve currencies because their relative economic and political significance is declining, and the EU will be particularly affected by the Russian sanctions after the outbreak of the war in Ukraine17. Currently, the euro has dropped in relation to the dollar and, although the European Central Bank has finally increased interest rates, the position of the euro is still weak18. As a potential alternative to the dollar, the Chinese yuan is increasingly mentioned, but for the time being there are several issues in that respect. First, China has no such developed financial market as the USA; second, the yuan is not convertible for transactions on the convertible account (China has capital control, which protected it from the 1997 crisis). For years, the yuan has been underestimated, which helps China to create the surplus in the current balance, while the cessation of the state intervention will weaken China’s foreign trade position and reduce FX reserves. Of course, China can replace the dollar by the euro, sell American securities (and it is doing so), change the structure of the securities, but all those measures pose substantial costs to China’s economy (Cooper, 2009). If China abruptly disposed of American securities, the dollar would drop and the value of the securities would be destroyed for China itself. Potential liberalization of the capital market in China would increase investments of private investors abroad and certainly reduce the purchase of securities in the US market by the Chinese central bank. However, the growth of Chinese economy inevitably leads to a type of internationalization of the yuan and, just as the dollar with the US economic domination displaced the pound and became the main world currency, the same fate is likely to be in store for the yuan. The first step is the yuan domination in Asia, gradual liberalization of the capital market and increase in bilateral arrangements in yuans, which is currently done in the trade between Russia and China, Iran and China and, most recently between China and Saudi Arabia, thus gradually reducing the influence of the Petrodollar. In addition, there is an idea for the creation of the golden yuan that would be an instrument of payment covered by gold, and convertible to gold at a defined rate of exchange.

Gita Gopinath, the researcher of this topic and the IMF Deputy Managing Director, warns of the gradually increasing influence of regional currencies and bilateral currency arrangements19 and of the dollar and the euro remaining as dominant currencies in the territory of the EU and the so-called collective West, which is now below 40% of world economy. Russia in particular insists on bilateral currency arrangements and it already has such relations with China, India, Iran, Saudi Arabia and probably with Turkey. After the sanctions were imposed on Russia, the ruble became significantly stronger and Russia also introduced the possibility of the ruble convertibility for gold at the rate of exchange of 5,000 rubles for one gram of gold20. Now Russia insists on the EU countries paying for its gas in rubles, and there is an initiative for extending it to agricultural products as well. Along with the BRICS initiative, these are the greatest challenges to further domination of the dollar.

Farhi and Maggiori analyzed in detail different options possible in the reform of international finance and dollar replacement (Farhi & Maggiori, 2017). They singled out several possible directions of the reform:

• A) The hegemon’s world (the dollar) or the multipolar world (the yuan, the BRICS currency) (Fratianni, 2012; Eichengreen, 2011).

• B) The model with ample reserve assets (bankor or SDRs).

• C) The gold standard with the fixed rate of exchange, as opposed to the floating one at the moment.

The authors believe (as agreed by Stiglitz too) that the world with more reserve currencies would be economically less stable and that a global reserve currency is a better solution. Re-introduction of the gold standard would also have a deflationary effect and consequences due to more difficult adjustments, smaller flexibility and increasing unemployment. On the other hand, this would lead to greater stability of foreign rates of exchange, lower inflation, balance of payments equilibrium and rare occurrence of international crises.

Russia’s victory in Ukraine and China’s leadership in economy might symbolically and essentially mark the end of American hegemony and domination in international economic institutions, the leading role of the dollar and military supremacy. It would be the end of Pax Americana, just as the end of Pax Britannica also meant the end of the British pound domination. Possible costs to the USA are: 1) America would find it harder to service easily its trade and budget deficit; 2) it would further threaten the US fiscal position, its growth, international competitiveness and financial position, as well as the power of the capital market; 3) it would deprive the USA of the funds for armament, investments in the military sector, military bases throughout the world and wars of conquest; 4) it would make it impossible for the USA to appropriate real goods by printing dollars with no countervalue (emission income); 5) it would lead to the weakening of the dollar position, the abandonment of dollar reserves and the disposal of securities.

Ever since 2008 and the Great Recession, it has been stated that the IMF, the World Trade Organization and other international economic and financial institutions are profoundly unjust, that they favoured the foreign trade position of the USA and the Western countries, that they lead to the world inequality in the distribution of income and that they follow a neoliberal agenda that suits the super-rich class (Dimitrijević, 2014). The IMF itself contributed to numerous crises in the world, intensified and exacerbated them (many examples from Latin America, Africa and Asia) by representing the service of the economic policy of the West and the US, with a series of political conditions and huge social costs. Within the IMF, the expert team paid attention to the matters of unequal distribution of income, the decline in global aggregate demand, the need for the IMF programs to be less rigid and more flexible, which has been observed in the past few years. However, the reforms of the IMF and the World Bank are proceeding rather slowly; there is a discrepancy between those who are the creative part of the team and those who have power in the IMF (executive directors and leading Western countries), so that the reforms are mainly of cosmetic nature21 (Rodriguez, 2017; Ocampo, 2001). The USA will not renounce willingly and easily the leading role of the dollar and the dominant position in international institutions. The belief remains that it will be forced into it by the outcome of the war in Ukraine, strengthening Chinese economy, the onset of the multipolar world and further weakening of Western economies, as already announced by the first results of economic trends in the USA, EU and G7 in 2022.

Potential direction of the changes are: 1) greater influence of the BRICS countries and growing economies on the IMF, the World Bank and the World Trade Organization; 2) statutory and institutional changes that will mean the change in the manner of making decisions and directing funds within these institutions; 3) change of priorities in the goals and work of these institutions towards greater equality, equitability and economic growth; 4) abandoning the dollar as a reserve currency and transformation of the IMF in the direction paved by Keynes, Stiglitz and other responsible economists; 5) increasing the role of regional development institutions (Asian Development Bank, Asian Infrastructure Investment Bank, BRICS, Eurasian Economic Union – EAEU). We believe that Russia’s special operation in Ukraine has triggered changes in international economic relations towards multipolarity, which are unstoppable and lead to radical improvement of economic relations in the world.

# Conclusion

International economic relations are characterized by unequal distribution of income that is increased at the cost of less developed countries, by inequality in decision-making in favour of wealthier countries and individuals, and the crisis of the dollar as the world reserve currency. The neoliberal economic model, which was mainly applied by the IMF, the World Bank, the World Trade Organization and the EU, experienced its historical failure and must give its place to a more balanced economic policy and multipolarity in geopolitical, economic and political relations. The application of the neoliberal economic policy, the dollar abuse and the US economic-political hegemony characterized by the liberalization of capital flows, the floating foreign exchange rate and excessive printing of the dollar, led to constant financial crises, instability in international finance, increasing prices and slower economic growth. China and Russia within BRICS challenged the hegemony of the USA and the dollar, so the process of change in international institutions is unstoppable. In the first stages, it will probably lead to the reduced role of the dollar as a reserve currency and the emergence of a rival reserve currency, as well as strengthened effect of bilateral currency arrangements. Seen from short- and long-term perspectives, the reform of the international economic system might lead to the creation of a central bank and a synthetic reserve currency that would more easily resolve balance of payment problems in world economy, and lead to faster economic growth and reduction of the differences in wealth and development between the West and the remainder of the developing world. An alternative to it, in the event of failure, is the interruption in positive aspects of globalization, division of the world into blocs, and closing economic flows within completed geopolitical spheres of influence (USA – Russia – China), which would be much less favourable solution in economic and developmental terms.

# Endnotes

 1During 2022, the IMF revised twice the expectations regarding the growth of the gross domestic product (GDP) in the EU, so the latest estimate from April is that the annual growth will be 2.6% instead of 2.8%. The estimate for 2023 is 1.2%, which is a downward revision by 1.4%. Speaking of the USA, the downward revision is by 1.4%, from 3.7% to 2.3%. The world GDP has been revised downwards by 0.4%. 2The inflation in the EU and the USA has already exceeded 10% and entered the two-digit zone, which is the highest level since the end of the 1970s. More precisely, in July the inflation in the USA was 9.1%, (the highest level since 1981), and in the EU 12.8%. In the EU, the price of food rose by 20% and the price of fuel by 28%. With the slower economic growth, it is possible to expect stagflation, which has already been announced by Roubini, one of the few economists who also predicted the 2008 Great Economic Recession (Roubini, 2021). 3The FED raised interest rates twice and now they vary between 2.25% and 2.5%. Previously, they had been raised from 1% to 1.75% with the aim of reducing inflation. The European Central Bank raised interest rates to 0.5% for the first time after 11 years, which market its exit from the zone of negative interest rates, the unprecedented phenomenon in economic history of the world. The Bank of England, as well as the National Bank of Serbia (NBS) acted in a similar manner. 4The aim was to destroy the Russian ruble, which would then lead to increasing inflation, stock exchange collapse and break-up of the entire financial system, which would soon paralyze Russia’s war operations as well. The Russian ruble actually dropped to 140 rubles for 1 dollar, but the exchange rate was soon stabilized at 70 rubles for 1 dollar. At the moment, Russia’s financial system is quite stable, with the budget surplus. 5At the very beginning of the 1930s, the share of the dollar and the pound in the world exchange was 50% : 50%, but after the Great Depression and the end of World War II, simultaneously with the breakup of the British Empire, the dollar became the only genuine world reserve currency. 6One fine ounce of gold has about 35 grams, which means that a gram of gold was slightly more valuable than one dollar. 7Trifin’s dilemma or Trifin’s paradox was presented in the work: Trifin, R. (1960) Gold and the Dollar Crisis, New Haven: Yale University Press. In brief, for the dollar to play the role of the reserve currency and provide the world with sufficient liquidity, the balance of the US current accounts must always be in the deficit. In the references, there are several other papers dealing with Trifin’s dilemma, for example Campanella, E. 2010. 8After high inflation, in Paul Walker’s era, the US Federal Reserve increased interest rates multiply significantly and in a short period, which was followed by other central banks of the Western countries. The result of these measures was the drastic increase in the debts of the Third World countries, which slowed down their development, put them into debt slavery and forced them to fulfil strict programs of the IMF, accompanied by the reforms that suited the interests of the USA and neoliberal economic ideology. 9The Mundell–Fleming model was named after its authors two economists (Fleming, 1962, and Mundell, 1963, who formulated the model autonomously). They expanded the famous IS-LM model by including the foreign interest rate and foreign rate of exchange, thus following the macroeconomic balance of open economy (small and big), with fixed and floating rates of exchange, with and without capital control. The model analyses the effect on the monetary and fiscal policy, as well as the overall macroeconomic balance. 10China and Vietnam implemented the capital control policy, which enabled them to prevent currency shocks and avoid the financial crisis that affected other economies with open trade and liberalized capital market. It is an important message for a subsequent economic policy. 11Ironically, hedge funds should ensure investors against risks because the term means, “surrounding with a fence”. In reality, Soros and other financial speculators used these funds, or “hot money”, and short-term shocks to the currencies of these countries to lead to great capital flight, destruction of national currencies and making huge gains. 12For further details, see Stiglitz in the series of books translated to Serbian: The Great Divide, Novi Sad: Akademska knjiga, 2015; Globalization and discontents, Belgrade; MIBA Books, 2011; The euro: How common currency threatens the future of Europe, Novi Sad: Akademska knjiga, 2016. Freefall: America, free markets, and the sinking of world economy, Novi Sad: Akademska knjiga, 2013. 13Greenspan was the Director of the US Federal Reserve for many years, both praised and disputed, while Guidotti was Deputy Minister of Finance of Argentina. 14For more about the topics regarding foreign exchange reserves, capital market liberalization and global financial stability, see also the analyses: IMF 2010, 2012, 2014. 15For more details about finance management in the public sector, see: Dželetović, 2016. 16At a meeting in Yekaterinburg in 2008, BRIC was established – an international economic association consisting of Brazil, Russia, India and China. In 2011, the South African Republic joined the association and that is how BRICS was formed. In 2014, BRICS also established the Development Bank in Brazil, with the initial capital of $50 billion and the headquarters in Shanghai. The association has an increasing economic and political effect, with the aim of being the counterweight to the Western countries. During 2022, Argentina, Turkey, Iran and Saudi Arabia expressed their willingness to join BRICS. 17For more details about the euro and monetary integrations, see: Dželetović & Šubara, 2017. 18For years, the rate of exchange between the euro and the dollar was about 1.2 dollars for one euro. After the outbreak of the Ukrainian crisis, the EU faced huge economic problems, while the ECB rather slowly increases the interest rate, while inflation has exceeded the limit of 12%. It weakened the euro so that currently the rate of exchange between the euro and the dollar is 1 to 1, which is the historical minimum of the value of the euro, with the tendency of further decline in relation to the dollar. 19Gita Gopinath in her interview for the Financial Times, taken from Politika of 5 September 2022. 20Russia undertook a whole series of measures to protect the financial system and the ruble. The ruble convertibility for gold was introduced at the fixed rate of exchange of 5,000 rubles for one gram of gold. Gold reserves of over 2,300 tons were accumulated, in the value of more than$500 billion, and FX reserves in the amount of about \$600 billion. The foreign debt is relatively small – below 20% of GDP. Capital control was introduced, and the possibility was limited of taking out a large amount of money from the country. Interest rates were raised to 20% and then reduced. The payments in rubles were introduced for gas and other export products. The result of the combined measures is the stronger and stabilized ruble in relation to the dollar. All the measures were aimed at increasing demand for the ruble. The inflation that increased to about 20% is under control now, with the tendency of reduction in the second half of 2022. 21For further detail about it, see excellent master’s paper: Rodriguez C., The Case of the International Monetary Fund and the 2008 Global Financial Crisis, 2017. https://www.e-ir.info/2017/11/29.

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## O članku

jezik rada: srpski, engleski
vrsta rada: izvorni naučni članak
DOI: 10.5937/socpreg56-40104
primljen: 11.09.2022.
prihvaćen: 29.09.2022.
objavljen u SCIndeksu: 11.11.2022.
metod recenzije: dvostruko anoniman

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