NANJING -- Stabilization of major currencies need to be addressed prior to broadening the role of the Special Drawing Right (SDR), Nobel laureate Robert Mundell told China Daily on Thursday.
Mundell, who is professor of economics at Columbia University, said he will deliver a speech on stabilization of major currencies, especially the dollar and the euro, on Thursday.
"The two big currencies are devastating and hurting the world economy, so I would propose to stabilize the dollar and euro rate with interventions and gradually narrow that band (of fluctuation), and after that create SDR, which would be based on dollar and euro, and Chinese yuan, Japanese yen, British pounds, then move that into the creation of … a global currency," he said.
Mundell, who won the Nobel Prize in economics in 1999, said one of the reasons that IMF refused to include the yuan in the SDR basket last year is that China's currency is not convertible.
"Whether China gets into the SDR, or India or another country gets in, technically we should change the way the system works," he said, adding that stabilization of major exchange rates, such as the dollar, euro, yen, and yuan, is the most important thing before working on SDR.
"I hope we don't spend too long talking about SDR. Today it is just a distraction of the real problem of the system. The big swings of exchange rate are (attributable to) the lack of anchor for the currencies we want to stabilize," he said.
He said as China develops a major world financial center in Shanghai, convertibility of the yuan will automatically follow very quickly.
French President Nicolas Sarkozy on Thursday called on the G20 to reach consensus on a timetable for broadening a basket of currencies, or the SDR, to include China's yuan.
Sarkozy made the remarks at the opening ceremony of a seminar on reforming the global monetary system in Nanjing, Jiangsu province. Among those in attendance are ministers and central bankers from the Group of 20 industrialized and emerging nations, including China's Vice-Premier Wang Qishan.
The basket determining the value of the SDR now includes the dollar, euro, yen and pound. The dollar, which is weakening due to the US' monetary loosening, is considered a major factor behind many of the world's financial problems.
The SDR is one of the possible tools that could replace the dollar in the future as a global currency to help stabilize the global financial system, analysts and officials said.
It is an international reserve asset, created by the IMF in 1969 to supplement its member countries' official reserves. Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies, according to the explanation of IMF.