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On the Credibility of Currency Boards

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  • Switgard Feuerstein
  • Oliver Grimm

Abstract

The paper compares the credibility of currency boards and (standard) pegs. Abandoning a currency board requires a time-consuming legislative process and an abolition will thus be well-anticipated. Therefore, a currency board solves the time-inconsistency problem of monetary policy. However, policy can react to unexpected shocks only with a time lag, thus the threat of large shocks makes the abolition more likely. Currency boards are more credible than standard pegs if the time-inconsistency problem dominates. In contrast, standard pegs, that can be left at short notice, are more credible if exogenous shocks are highly volatile and constitute the dominant problem. Copyright � 2006 The Authors; Journal compilation � 2006 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 14 (2006)
Issue (Month): 5 (November)
Pages: 818-835

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Handle: RePEc:bla:reviec:v:14:y:2006:i:5:p:818-835

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References

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  1. Chang, Roberto & Velasco, Andres, 2000. "Financial Fragility and the Exchange Rate Regime," Journal of Economic Theory, Elsevier, vol. 92(1), pages 1-34, May.
  2. Corrinne Ho, 2002. "A survey of the institutional and operational aspects of modern-day currency boards," BIS Working Papers 110, Bank for International Settlements.
  3. Helge Berger & Henrik Jensen & Guttorm Schjelderup, 2001. "To Peg or Not To Peg? A Simple Model of Exchange Rate Regime Choice In Small Economies," CESifo Working Paper Series 468, CESifo Group Munich.
  4. Gregor Irwin, 2004. "Currency boards and currency crises," Oxford Economic Papers, Oxford University Press, vol. 56(1), pages 64-87, January.
  5. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March.
  6. Oliva, Maria-Angels & Rivera-Batiz, Luis A & Sy, Amadou N R, 2001. "Discipline, Signaling, and Currency Boards," Review of International Economics, Wiley Blackwell, vol. 9(4), pages 608-25, November.
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Cited by:
  1. Oliver Grimm, 2007. "Fiscal Discipline and Stability under Currency Board Systems," CER-ETH Economics working paper series 07/66, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  2. Cappiello, Antonio, 2006. "I currency board come strumento di stabilizzazione economica: come funzionano e dove sono adottati
    [Currency boards as instrument for economic stabilisation: how they work and where they are adopte
    ," MPRA Paper 4966, University Library of Munich, Germany.

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