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

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

Author Info

Jacob De Haan
Helge Berger
Erik Van Fraassen

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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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Publisher Info
Paper provided by LICOS - Centre for Institutions and Economic Performance, K.U.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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Article
- 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. [Downloadable!] (restricted)

Find related papers by JEL classification:
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
F31 - International Economics - - International Finance - - - Foreign Exchange

This paper has been announced in the following NEP Reports:

NEP-ALL-2003-11-03 (All new papers)
NEP-IFN-2003-11-03 (International Finance)
NEP-MAC-2003-11-03 (Macroeconomics)
NEP-MFD-2003-11-03 (Microfinance)
NEP-MON-2003-11-03 (Monetary Economics)
NEP-RMG-2003-11-03 (Risk Management)
NEP-TRA-2003-11-03 (Transition Economics)

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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.
Loungani, Prakash & Sheets, Nathan, 1997. "Central Bank Independence, Inflation, and Growth in Transition Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 381-99, August.
Other versions:
- 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.). [Downloadable!]
Berger, Helge & Sturm, Jan-Egbert & Haan, Jakob de, 2000. "An Empirical Investigation into Exchange Rate Regime Choice and Exchange Rate Volatility," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
Berger, Helge & Haan, Jakob de & Eijffinger, Sylvester C.W, 2000. "Central Bank Independence: An Update of Theory and Evidence," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
Other versions:
- 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. [Downloadable!] (restricted)
- Berger, Helge & de Haan, Jakob & Eijffinger, Sylvester C W, 2001. " Central Bank Independence: An Update of Theory and Evidence," Journal of Economic Surveys, Blackwell Publishing, vol. 15(1), pages 3-40, February. [Downloadable!] (restricted)
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. [Downloadable!]
Other versions:
- Iikka Korhonen, 2000. "Currency Boards in the Baltic Countries: What Have We Learned?," Post-Communist Economies, Taylor and Francis Journals, vol. 12(1), pages 25-46, March. [Downloadable!] (restricted)
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. [Downloadable!] (restricted)
Adam Bennett, 1993. "The Operation of the Estonian Currency Board," IMF Policy Discussion Papers 92/3, International Monetary Fund.
Fleming, Alex & Talley, Samuel, 1996. "The Latvian banking crisis : lessons learned," Policy Research Working Paper Series 1590, The World Bank. [Downloadable!]
Santiprabhob, Veerathai, 1997. "Bank Soundness and Currency Board Arrangements: Issues and Experience," IMF Papers on Policy Analysis and Assessments 97/11, International Monetary Fund. [Downloadable!]
Veerathai Santiprabhob, 1997. "Bank Soundness and Currency Board Arrangements: Issues and Experience," IMF Policy Discussion Papers 97/11, International Monetary Fund.
Eijffinger, S-C-W & de Haan, J, 1996. "The Political Economy of Central-Bank Independence," Princeton Studies in International Economics 19, International Economics Section, Departement of Economics Princeton University,.
Other versions:
- Eijffinger, S. & De Hann, J., 1995. "The Political Economy of Central Bank Independence," Papers 9587, Tilburg - Center for Economic Research.
J. Bradford DeLong, 1998. "The budget deficit," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Jan 30. [Downloadable!]

Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Vivek H. Dehejia & Nadja Kamhi, 2004. "An Assessment of the Currency Board Regime in Bosnia and Herzegovina," Carleton Economic Papers 05-01, Carleton University, Department of Economics, revised 06 Feb 2005. [Downloadable!]
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. [Downloadable!]

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