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How to Reduce Inflation: An Independent Central Bank or A Currency Board? The Experience of the Baltic Countries

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  • Jacob De Haan
  • Helge Berger
  • Erik Van Fraassen

Abstract

Countries in transition often face high levels of inflation. This paper discusses two ways to reduce inflation: the creation of an independent central bank and the introduction of a currency board. It is shown that both options have advantages and disadvantages. This framework is used for a normative analysis of the policy choices of the Baltic states. It is argued that, while Estonia's currency board based on the D-mark is very much in line with the criteria for an optimal monetary regime, Lithuania's initial choice of a US-dollar based currency board is not. The peg to the SDR - which very much looks like a currency board - as (eventually) adopted by Latvia is an intermediate case. Some policy recommendations and the problem of exit strategies towards the Euro zone are discussed.

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Bibliographic Info

Paper provided by LICOS - Centre for Institutions and Economic Performance, KU Leuven in its series LICOS Discussion Papers with number 9601.

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Length: 28 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:lic:licosd:9601

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Keywords: currency board; central bank independence; Baltics;

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References

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  1. Eijffinger, S. & De Hann, J., 1995. "The Political Economy of Central Bank Independence," Papers 9587, Tilburg - Center for Economic Research.
  2. Korhonen, Iikka, 1999. "Currency Boards in the Baltic Countries: What Have We Learned?," BOFIT Discussion Papers 6/1999, Bank of Finland, Institute for Economies in Transition.
  3. Berger, Helge & de Haan, Jakob & Eijffinger, Sylvester C W, 2000. "Central Bank Independence: An Update of Theory and Evidence," CEPR Discussion Papers 2353, C.E.P.R. Discussion Papers.
  4. Richard W. Kopcke, 1999. "Currency boards: once and future monetary regimes?," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 21-37.
  5. repec:imf:imfpdp:9710 is not listed on IDEAS
  6. 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.).
  7. Eijffinger, S.C.W. & Haan, J. de, 2000. "European Monetary and Fiscal Policy," Open Access publications from Tilburg University urn:nbn:nl:ui:12-82796, Tilburg University.
  8. repec:imf:imfpdp:9601 is not listed on IDEAS
  9. Donal McGettigan, 2000. "Current Account and External Sustainability in the Baltics, Russia, and Other Countries of the Former Soviet Union," IMF Occasional Papers 189, International Monetary Fund.
  10. Fleming, Alex & Talley, Samuel, 1996. "The Latvian banking crisis : lessons learned," Policy Research Working Paper Series 1590, The World Bank.
  11. John Williamson, 1995. "What Role of Currency Boards?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number pa40.
  12. Jeffrey A. Frankel, 1999. "No Single Currency Regime is Right for All Countries or At All Times," NBER Working Papers 7338, National Bureau of Economic Research, Inc.
  13. repec:imf:imfpdp:9711 is not listed on IDEAS
  14. 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.
  15. Sikken, Bernd Jan & de Haan, Jakob, 1998. "Budget Deficits, Monetization, and Central-Bank Independence in Developing Countries," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 493-511, July.
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Citations

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Cited by:
  1. Masso, Jaan & Staehr, Karsten, 2005. "Inflation dynamics and nominal adjustment in the Baltic States," Research in International Business and Finance, Elsevier, vol. 19(2), pages 281-303, June.
  2. Uz, Idil & Ketenci, Natalya, 2008. "Panel analysis of the monetary approach to exchange rates: Evidence from ten new EU members and Turkey," Emerging Markets Review, Elsevier, vol. 9(1), pages 57-69, March.
  3. Berlemann, Michael & Nenovsky, Nikolay, 2003. "Lending of first versus lending of last resort: The Bulgarian financial crisis of 1996/1997," Dresden Discussion Paper Series in Economics 11/03, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
  4. Katsimi, Margarita, 2008. "Exchange rate strategies towards the euro-zone for new EU member states with currency boards," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 1043-1063, September.
  5. 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.
  6. 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.
  7. 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.
  8. Lucio Vinhas de Souza, 2002. "Integrated monetary and exchange rate frameworks: are there empirical differences?," Bank of Estonia Working Papers 2002-2, Bank of Estonia, revised 12 Oct 2002.

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