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Currency boards: once and future monetary regimes?

  • Richard W. Kopcke
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    A currency board can allow a developing economy to establish its domestic currency relatively promptly and efficiently by fixing the value of its currency to that of another country and guaranteeing that its currency is backed by sufficient foreign exchange reserves. Currency boards not only provide a foundation that encourages traders and investors to accept new currencies, they also do not require sophisticated money markets and central banking operations in order to be effective. Because of these attributes, currency boards have attracted more attention, particularly in the wake of recent global financial crises, from developing countries in Asia, Latin America, and Europe that have either introduced new currencies or want to restore confidence in their currencies.> The author reviews the design of currency boards, the choice of reserve currency and exchange rate, and the role of a currency board in fiscal and monetary policy. He concludes that while currency boards can provide a foundation for new currencies, these boards alone cannot ensure success. Although a board guarantees the backing of its base money, faith in its currency rests on traders' and investors' confidence in the economy's financial institutions, capital markets, and fiscal management. Although a board might cause its economy to import a reputable monetary policy, it cannot ensure that this policy suits its economy's needs. Currency boards represent a start, more than a destination, for the design of monetary authorities, the author concludes.

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    Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

    Volume (Year): (1999)
    Issue (Month): May ()
    Pages: 21-37

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    Handle: RePEc:fip:fedbne:y:1999:i:may:p:21-37
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    1. Yum K. Kwan & Francis Lui, 1999. "Hong Kong's Currency Board and Changing Monetary Regimes," NBER Chapters, in: Changes in Exchange Rates in Rapidly Developing Countries: Theory, Practice, and Policy Issues (NBER-EASE volume 7), pages 403-436 National Bureau of Economic Research, Inc.
    2. Caprio, Gerard Jr. & Dooley, Michael & Leipziger, Danny & Walsh, Carl, 1996. "The lender of last resort function under a currency board : the case of Argentina," Policy Research Working Paper Series 1648, The World Bank.
    3. Norman S. Fieleke, 1992. "The quest for sound money: currency boards to the rescue," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 14-24.
    4. Michael Gavin & Roberto Perotti, 1997. "Fiscal Policy in Latin America," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 11-72 National Bureau of Economic Research, Inc.
    5. Carlos E. Zarazaga, 1995. "Argentina, Mexico, and currency boards: another case of rules versus discretion," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q IV, pages 14-24.
    6. Schwartz, Anna J., 1993. "Currency boards: their past, present, and possible future role," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 147-187, December.
    7. Geoffrey M.B. Tootell, 1990. "Central bank flexibility and the drawbacks to currency unification," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 3-18.
    8. John Williamson, 1995. "What Role of Currency Boards?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number pa40.
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