On the Credibility of Currency Boards
The 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 well-anticipated. 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. Copyright © 2006 The Authors; Journal compilation © 2006 Blackwell Publishing Ltd.
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Volume (Year): 14 (2006)
Issue (Month): 5 (November)
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References listed on IDEAS
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