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Unemployment Gap in the Currency Board Regime

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  • Novak Kondić

    ()
    (Economics Faculty in Banja Luka)

  • Borivoje D. Krušković

    ()
    (Economics Faculty in Banja Luka)

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    Abstract

    A currency board combines three elements: a fixed exchange rate between a country’s currency and an “anchor currency,” automatic convertibility, and a long-term commitment to the system, often made explicit in the central bank law. The main reason for countries to consider a currency board is to demonstrate that they are pursuing an anti-inflationary policy. The mechanism works through changes in the money supply, which lead to interest rate changes, which, in turn, encourage funds to move between the domestic and the anchor currency. This is essentially the same mechanism that operates under a fixed exchange rate, but the exchange rate guarantee implied in the currency board rules ensures that the necessary interest rate changes and the attendant costs for the economy will be comparatively lower.

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    File URL: http://www.cb-cg.org/repec/cbk/journl/vol2no3-4.pdf
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    Bibliographic Info

    Article provided by Central bank of Montenegro in its journal Journal of Central banking Theory and Practice.

    Volume (Year): 2 (2013)
    Issue (Month): 3 ()
    Pages: 71-84

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    Handle: RePEc:cbk:journl:v:2:y:2013:i:3:p:71-84

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    Related research

    Keywords: currency board; exchange rate; devaluation; inflation;

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    1. Atish R. Ghosh & Anne-Marie Gulde & Holger C. Wolf, 2000. "Currency boards: More than a quick fix?," Economic Policy, CEPR;CES;MSH, vol. 15(31), pages 269-335, October.
    2. Tsang, Shu-ki & Ma, Yue, 2002. "Currency substitution and speculative attacks on a currency board system," Journal of International Money and Finance, Elsevier, vol. 21(1), pages 53-78, February.
    3. Drazen, Allan & Masson, Paul R, 1994. "Credibility of Policies versus Credibility of Policymakers," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 735-54, August.
    4. Margarita Katsimi, 2004. "Exchange Rate Strategies towards EMU for Accession Countries with Currency Boards," EUI-RSCAS Working Papers 18, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
    5. International Monetary Fund, 2002. "Lithuania," IMF Working Papers 02/127, International Monetary Fund.
    6. Schwartz, Anna J., 1993. "Currency boards: their past, present, and possible future role," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 147-187, December.
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