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Currency Boards in the Baltic Countries: What Have We Learned?

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  • Iikka Korhonen

Abstract

Straightforward exchange rate arrangements known as currency boards have gained popularity during the past decade. Among transition economies, Estonia first introduced a currency board in 1992, followed by Lithuania in 1994 and Bulgaria in 1997. Currency boards have been useful in achieving macroeconomic stabilisation, and they may have helped the Baltics become the first countries of the former Soviet Union (FSU) to achieve economic growth after the slump in production of the early 1990s. Moreover, Baltic inflation performance has been substantially better than in other FSU countries. Both in Estonia and Lithuania the present exchange rate system has been accompanied by strong real appreciation of the currency, although it is widely accepted that the currencies were very much undervalued when they were initially pegged. However, if rapid real appreciation is accompanied by increases in labour productivity, the present pegs can be maintained. Banking crises in Estonia and Lithuania have not been particularly severe, so apparently rigid currency pegs have not been accompanied by excessive financial sector instability. The tight fiscal policies pursued in both countries, especially Estonia, have been instrumental to the success of these currency board arrangements.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Post-Communist Economies.

Volume (Year): 12 (2000)
Issue (Month): 1 ()
Pages: 25-46

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Handle: RePEc:taf:pocoec:v:12:y:2000:i:1:p:25-46

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  1. Fleming, Alex & Lily Chu & Bakker, Marie-Renee, 1996. "The Baltics - Banking crises observed," Policy Research Working Paper Series 1647, The World Bank.
  2. John Williamson, 1995. "What Role of Currency Boards?," Peterson Institute Press: Policy Analyses in International Economics, Peterson Institute for International Economics, number pa40, November.
  3. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  4. repec:imf:imfpdp:9711 is not listed on IDEAS
  5. Prakash Loungani & Nathan Sheets, 1995. "Central bank independence, inflation and growth in transition economies," International Finance Discussion Papers 519, Board of Governors of the Federal Reserve System (U.S.).
  6. Atish R. Ghosh, 1998. "Currency Boards," IMF Working Papers 98/8, International Monetary Fund.
  7. 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.
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Cited by:
  1. Nikolay Nenovsky, 2001. "The Currency Board in Estonia, Lithuania and Bulgaria: Comparative Analysis," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 3, pages 24-45.
  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. Sarkis Joseph Khoury & Clas Wihlborg, 2006. "Outsourcing Central Banking: Lessons from Estonia," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 9(2), pages 125-144.
  4. Sõrg, Mart, 2004. "Estonian Monetary System: Reconstruction, Performance, and Future Prospects," Wirtschaftswissenschaftliche Diskussionspapiere 11/2004, Ernst Moritz Arndt University of Greifswald, Faculty of Law and Economics.
  5. Mart Sõrg, 2005. "Estonia’s Accession to the EMU," Working Papers 133, Tallinn School of Economics and Business Administration, Tallinn University of Technology.
  6. D. Mario Nuti, 2000. "The Costs and Benefits of Euro-sation in Central-Eastern Europe Before or Instead of EMU Membership," William Davidson Institute Working Papers Series 340, William Davidson Institute at the University of Michigan.
  7. Kalev Kukk, 2007. "Estonia’s Way from Soviet Rouble to Own Kroon," Working Papers 163, Tallinn School of Economics and Business Administration, Tallinn University of Technology.
  8. Slavov, Slavi T., 2008. "Measuring and modeling the effects of G-3 exchange rate fluctuations on small open economies: A natural experiment," Economic Systems, Elsevier, vol. 32(3), pages 253-273, September.

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