Currency Boards, Credibility, and Macroeconomic Behavior
AbstractCurrency boards operate differently from standard pegs. The former exhibit greater currency stability and lower transaction costs, inflation, and nominal interest rates, but are limited in their use of devaluation. We extend Drazen and Masson's (1994) signaling model to consider the choice between currency board arrangements and standard pegs. The model shows that currency boards' effectiveness hinges on their credibility properties and that they can improve welfare even with high unemployment persistence. By reducing expected inflation and the negative employment effect arising from expected but unrealized inflation, currency boards can produce less unemployment than peg regimes that abstain from devaluation.
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Bibliographic InfoPaper provided by International Monetary Fund in its series IMF Working Papers with number 00/97.
Date of creation: 01 Jun 2000
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Other versions of this item:
- Luis A. Rivera-Batiz & Amadou N. R. Sy, 2013. "Currency Boards, Credibility, and Macroeconomic Behavior," Annals of Economics and Finance, Society for AEF, vol. 14(3), pages 831-870, December.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
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