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Unemployment Gap in the Currency Board Regime

Author

Listed:
  • Novak Kondić

    (Economics Faculty in Banja Luka)

  • Borivoje D. Krušković

    (Economics Faculty in Banja Luka)

Abstract

A currency board combines three elements: a fixed exchange rate between a country’s currency and an “anchor currency,” automatic convertibility, and a long-term commitment to the system, often made explicit in the central bank law. The main reason for countries to consider a currency board is to demonstrate that they are pursuing an anti-inflationary policy. The mechanism works through changes in the money supply, which lead to interest rate changes, which, in turn, encourage funds to move between the domestic and the anchor currency. This is essentially the same mechanism that operates under a fixed exchange rate, but the exchange rate guarantee implied in the currency board rules ensures that the necessary interest rate changes and the attendant costs for the economy will be comparatively lower.

Suggested Citation

  • Novak Kondić & Borivoje D. Krušković, 2013. "Unemployment Gap in the Currency Board Regime," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 2(3), pages 71-84.
    • Handle: RePEc:cbk:journl:v:2:y:2013:i:3:p:71-84
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    File URL: http://www.cb-cg.org/repec/cbk/journl/vol2no3-4.pdf
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    References listed on IDEAS

    as
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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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