In this article, the author presents a blueprint for sovereign wealth fund (SWF) best practices. This blueprint is based on a scoreboard for the current practices of 44 SWFs. The blueprint in turn provides a basis for evaluating the results of the IMF - sponsored dialogue on SWF best practices. The author concludes this paper with a few observations on implementing SWF best practices. JEL Classification : F30, G29, G34

1 7 5 0 M a s s a c h u s e t t s a v e n u e , n W | W a s h i n g t o n , D c 2 0 0 3 6 -1 9 0 3 t e l : ( 2 0 2 ) 3 2 8 -9 0 0 0 | F a x : ( 2 0 2 ) 6 5 9 -3 2 2 5 | W W W . i i e . c o MThe Case for an International Reserve Diversification Standard Edwin M. Truman and Anna WongAbstract: Rumors about the actual or potential currency diversification of countries' foreign exchange holdings out of dollars are not a new phenomenon. This working paper argues that such concerns about reserve diversification are exaggerated. We present evidence that the extent of actual diversification has been modest to date. Nevertheless, the potential for reserve diversification adds volatility to foreign exchange markets and can catalyze abrupt exchange rate movements. We argue that policymakers acting in their own national interests can do something constructive to reduce the volatility introduced into foreign exchange and financial markets by rumors of large-scale international foreign exchange reserve diversification. We propose the voluntary adoption by major foreign exchange reserve holders in particular of an International Reserve Diversification Standard consisting of two elements: (1) routine disclosure of the currency composition of official foreign exchange holdings and (2) a commitment by each adherent to adjust gradually the actual currency composition of its reserves to any new benchmark for those holdings.

Halving the US current account deficit as a share of GDP is likely to impose a burden of $2,350 per capita on the United States, which explains why US policymakers want to postpone adjustment. The rest of the world relies on the economic stimulus of a widening US external deficit, which explains why they are not eager to see global adjustment. The paper examines three scenarios of exchange rate adjustments, calls on the Federal Reserve to take more account of the external deficit in its words and policy actions, and familiarly notes the need for US fiscal adjustment as part of an efficient adjustment process. Complementary policies are required in the rest of the world. The paper discusses the pattern of recent international capital flows and proposes an international reserve diversification standard to remove some of the uncertainty about the management of foreign exchange reserves.

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