There has been considerable interest in recent years in the possibility of a “hard” SDR. This interest is motivated by the desire for an international yardstick of monetary stability and inspired, in part, by the proposals for a hard European Currency Unit. This paper explores the idea of a hard SDR in the light of earlier discussions aimed at making it a standard of constant purchasing power. It concludes that under the present conditions of generalized floating of major currencies, the asymmetrical basket technique is not a feasible option. Defining the SDR’s value in terms of a specific commodity basket, along the lines of the commodity reserve currency proposals, is also ruled out as impractical and not likely to achieve the objective of stable purchasing power for the SDR. The paper then discusses a proposal to change the basket of the current SDR in line with the inflation rates of the five component currencies so that the value of the SDR is protected from erosion by inflation. The construction and computation of such a “hard SDR basket” is illustrated on a monthly basis for the period from July 1974 to July 1993. The hard SDR, thus defined, could provide a unit of account of constant purchasing power which could be useful in international trade and commerce. It could also provide an anchor to which currencies could be pegged to maintain their purchasing power in terms of a basket of goods and services of the five countries whose currencies are included in the SDR. The adoption of the hard SDR to denominate Fund quotas would insulate quotas from erosion by inflation. The value of SDR allocations denominated in hard SDRs would be protected from erosion by inflation.
The paper demonstrates that the construction of a hard SDR that would preserve its purchasing power over goods and services is technically feasible. The decision to adopt such a hard SDR for Fund operations would, nevertheless, depend on a number of policy and operational considerations that are outside the scope of the paper. One possibility would be to compute and publish the “hard” SDR as a standard of constant purchasing power and a unit of account for use in commercial contracts or other purposes, without adopting it for Fund operations.