On the Credibility of Currency Boards
AbstractThe paper compares the credibility of currency boards and (standard) pegs. Abandoning a currency board requires a time-consuming legislative process and an abolition will thus be previously expected. Therefore, a currency board solves the time inconsistency problem of monetary policy. However, policy can react to unexpected shocks only with a time lag, thus the threat of large shocks makes the abolition more likely. Currency boards are more credible than standard pegs if the time inconsistency problem dominates. In contrast, standard pegs, that can be left at short notice, are more credible if exogenous shocks are highly volatile and constitute the dominant problem. --
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Bibliographic InfoPaper provided by University of Goettingen, Department of Economics in its series Center for European, Governance and Economic Development Research Discussion Papers with number 36.
Date of creation: 2004
Date of revision:
monetary policy; currency board; standard peg; credibility; time inconsistency problem; stochastic purchasing power parity;
Other versions of this item:
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
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[Currency boards as instrument for economic stabilisation: how they work and where they are adopte," MPRA Paper 4966, University Library of Munich, Germany.
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