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The History and Sustainability of the CBA in Estonia

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Author Info

  • Urmas Sepp

    (Bank of Estonia)

  • Raoul Lättemäe

    (Bank of Estonia)

  • Martti Randveer

    (Bank of Estonia)

Abstract

Estonia has had a currency board arrangement (CBA) for more than 10 years. Due to the successful performance of the Estonian economy under a CBA the current position of the Bank of Estonia is to maintain its exchange rate regime until full participation in the EMU, inter alia, during Estonia’s participation in ERM 2. Therefore, it is necessary to analyse the reasons for maintaining the CBA in the past and whether it is a viable option in the future. The main aim of this paper is therefore to give an overview of the history of the Estonian CBA and examine the different aspects of its sustainability. In section 2 the article describes the basic features of the CBA in general and the Estonian CBA in particular and discusses the rationale for the choice of a CBA in Estonia. The third section of the article describes the main developments of the Estonian economy during the last 10 years. Both financial sector and real sector developments are briefly discussed. In the fourth section, we assess the sustainability of the Estonian CBA. We specifically analyze whether the preconditions for the successful performance of the CBA are in place. First, we examine the fiscal policy stance after the introduction of the currency board with special emphasis upon the period strongly influenced by external shocks (1997–1999). Secondly, we discuss the flexibility of the real sector of the economy. For this purpose the flexibility of wage setting, movements in the real exchange rate and changes in foreign trade are discussed. Thirdly, we analyse the resilience of the banking sector by looking at its performance during the external shocks experienced during the Asian and Russian crises. The article concludes that the Estonian economy fulfils the main economic preconditions for the sustainability of the CBA – sufficient fiscal discipline, flexibility of the real sector and resilience of the financial sector. Therefore, the CBA could be considered a suitable exchange rate arrangement before Estonia’s entry to the third stage of the EMU.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0212002.

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Length: 36 pages
Date of creation: 10 Dec 2002
Date of revision:
Handle: RePEc:wpa:wuwpma:0212002

Note: Type of Document - Aplication/PDF; prepared on none; to print on none; pages: 36; figures: included. Published in Alternative Monetary Regimes in Entry to EMU
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Web page: http://128.118.178.162

Related research

Keywords: Estonia; Currency Board;

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References

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  1. Amadou N. R. Sy & Luis Rivera-Batiz, 2000. "Currency Boards, Credibility, and Macroeconomic Behavior," IMF Working Papers 00/97, International Monetary Fund.
  2. Atish R. Ghosh, 1998. "Currency Boards: The Ultimate Fix?," IMF Working Papers 98/8, International Monetary Fund.
  3. Fabio Filipozzi, 2000. "Equilibrium exchange rate of the Estonian kroon, its dynamics and impacts of deviations," Bank of Estonia Working Papers 2000-3, Bank of Estonia, revised 13 Oct 2005.
  4. Rasmus Pikkani, 2001. "Monetary transmission mechanism in Estonia - empirical model," Bank of Estonia Working Papers 2001-5, Bank of Estonia, revised 12 Oct 2001.
  5. 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.
  6. Anne Marie Gulde & Juha Kähkönen & Peter Keller, 2000. "Pros and Cons of Currency Board Arrangements in the Lead-Up to EU Accession and Participation in the Euro Zone," IMF Policy Discussion Papers 00/1, International Monetary Fund.
  7. Charles Enoch & Tomás J. T. Baliño, 1997. "Currency Board Arrangements: Issues and Experiences," IMF Occasional Papers 151, International Monetary Fund.
  8. Marit Hinnosaar, 2002. "Unemployment and Labour Mobility in Estonia: Analysis Using Duration Models," Bank of Estonia Working Papers 2002-07, Bank of Estonia, revised 13 Oct 2002.
  9. Urmas Sepp & Andres Vesilind & Ülo Kaasik, 2000. "Estonian Inflation Model," Bank of Estonia Working Papers 2000-1, Bank of Estonia, revised 10 Oct 2000.
  10. Urmas Sepp & Martti Randveer, 2002. "Aspects of the Sustainability of Estonian Currency Board Arrangement," Bank of Estonia Working Papers 2002-05, Bank of Estonia, revised 11 Oct 2002.
  11. Faggio, Giulia & Konings, Jozef, 1999. "Gross Job Flows and Firm Growth in Transition Countries: Evidence Using Firm Level Data on Five Countries," CEPR Discussion Papers 2261, C.E.P.R. Discussion Papers.
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Cited by:
  1. 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.

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