The issue of "external imbalances" among the world's major trading nations has been a topic of discussion for a generation. A 1988 Working Paper of the International Monetary Fund (IMF) highlighted "external imbalances" among the United States, Germany and Japan as the primary policy challenge of the global economy. This sounds familiar enough except for the composition of some of the countries involved. So why is it that the world is still grappling with the same problem more than two decades down the road?

One of several possible answers is the difficulty in finding an international monetary system (IMS) that allows sufficient autonomy to individual countries while ensuring harmony in an increasingly interconnected global economy.

At the core of the IMS are individual exchange regimes, which are commitments by countries to value their currencies in a certain way relative to other currencies. These commitments - by the way economies are interconnected - entail giving up independence on some aspects of a country's macroeconomic policies. For example, a country with its currency fixed to another currency will lose monetary policy independence, with the degree depending on how freely capital can flow in and out of the country, that is, convertibility of the capital account. Thus, adopting a certain exchange rate regime is also a commitment on how a country intends to manage its macroeconomic policies.

The current international monetary system is built on two major and several minor convertible currencies, namely the US dollar and the euro, and the Japanese yen, pound sterling, Australian dollar, and the Swiss franc. In fact, the currencies of 91 countries out of 188 IMF members are pegged in various forms to the US dollar (called exchange rate anchor), the euro, or a composite of currencies. About 43 countries peg their currencies to the US dollar, 27 to the euro and the rest to some form of composite basket.

The other 97 countries have a separate monetary policy framework, allowing their currencies to adjust according to their internal monetary policy rules, such as targeting a monetary aggregate or inflation.

China is currently classified as a "crawl-like arrangement" according to the IMF's exchange rate classification. Irrespective of the exchange rate regime, the US dollar is by far the main currency choice for holding international reserves, cross border transactions and bank loans, deposits and debt securities.

The choice of the reserve currency obviously depends on the users. But such choices are made in the context of a market framework and a governance structure that usually go well beyond economic aspects. Market framework needs to provide convenience of settlement and clearing facilities, access to the currency-issuing country's physical and financial assets and preservation of the value of these assets over time. These are essential elements determining the demand of a reserve currency.