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Currency boards: once and future monetary regimes?

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  • Richard W. Kopcke
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    Abstract

    A currency board can allow a developing economy to establish its domestic currency relatively promptly and efficiently by fixing the value of its currency to that of another country and guaranteeing that its currency is backed by sufficient foreign exchange reserves. Currency boards not only provide a foundation that encourages traders and investors to accept new currencies, they also do not require sophisticated money markets and central banking operations in order to be effective. Because of these attributes, currency boards have attracted more attention, particularly in the wake of recent global financial crises, from developing countries in Asia, Latin America, and Europe that have either introduced new currencies or want to restore confidence in their currencies.> The author reviews the design of currency boards, the choice of reserve currency and exchange rate, and the role of a currency board in fiscal and monetary policy. He concludes that while currency boards can provide a foundation for new currencies, these boards alone cannot ensure success. Although a board guarantees the backing of its base money, faith in its currency rests on traders' and investors' confidence in the economy's financial institutions, capital markets, and fiscal management. Although a board might cause its economy to import a reputable monetary policy, it cannot ensure that this policy suits its economy's needs. Currency boards represent a start, more than a destination, for the design of monetary authorities, the author concludes.

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    Bibliographic Info

    Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

    Volume (Year): (1999)
    Issue (Month): May ()
    Pages: 21-37

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    Handle: RePEc:fip:fedbne:y:1999:i:may:p:21-37

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    Keywords: Currency boards ; Money ; Monetary policy ; Foreign exchange;

    References

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    1. Gerald Caprio & Michael Dooley & Danny Leipziger & Carl Walsh, 1996. "The lender of last resort function under a currency board: The case of Argentina," Open Economies Review, Springer, vol. 7(1), pages 625-650, March.
    2. repec:imf:imfpdp:9601 is not listed on IDEAS
    3. Yum K. Kwan & Francis T. Lui, 1996. "Hong Kong's Currency Board and Changing Monetary Regimes," NBER Working Papers 5723, National Bureau of Economic Research, Inc.
    4. Michael Gavin & Roberto Perotti, 1997. "Fiscal Policy in Latin America," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 11-72 National Bureau of Economic Research, Inc.
    5. John Williamson, 1995. "What Role of Currency Boards?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number pa40.
    6. Geoffrey M.B. Tootell, 1990. "Central bank flexibility and the drawbacks to currency unification," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 3-18.
    7. repec:imf:imfpdp:9711 is not listed on IDEAS
    8. Carlos E. Zarazaga, 1995. "Argentina, Mexico, and currency boards: another case of rules versus discretion," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q IV, pages 14-24.
    9. 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.
    10. Norman S. Fieleke, 1992. "The quest for sound money: currency boards to the rescue," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 14-24.
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    Cited by:
    1. Neven Valev & John A. Carlson, 2002. "Tenuous Financial Stability," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0210, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    2. de Haan, Jakob & Berger, Helge & van Fraassen, Erik, 2001. "How to reduce inflation: an independent central bank or a currency board? The experience of the Baltic countries," Emerging Markets Review, Elsevier, vol. 2(3), pages 218-243, September.
    3. Neven Valev, 2000. "Building Monetary Credibility in a Transforming Economy," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0212, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    4. LeClair, Mark S., 2007. "Currency regimes and currency crises: What about cocoa money?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 17(1), pages 42-57, February.
    5. Dominique Torre & Alain Raybaut, 2004. "Unions monétaires, caisses d'émission et dollarisation : les fondements analytiques des systèmes de change « ultra-fixes »," Revue d'Économie Financière, Programme National Persée, vol. 75(2), pages 37-54.
    6. Sophie Chauvin, 2001. "Exit Options for Argentina with a Special Focus on Their Impact on External Trade," Working Papers 2001-07, CEPII research center.

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