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How to Reduce Inflation: An Independent Central Bank or A Currency Board? The Experience of the Baltic Countries

  • Jacob De Haan
  • Helge Berger
  • Erik Van Fraassen

Countries in transition often face high levels of inflation. This paper discusses two ways to reduce inflation: the creation of an independent central bank and the introduction of a currency board. It is shown that both options have advantages and disadvantages. This framework is used for a normative analysis of the policy choices of the Baltic states. It is argued that, while Estonia's currency board based on the D-mark is very much in line with the criteria for an optimal monetary regime, Lithuania's initial choice of a US-dollar based currency board is not. The peg to the SDR - which very much looks like a currency board - as (eventually) adopted by Latvia is an intermediate case. Some policy recommendations and the problem of exit strategies towards the Euro zone are discussed.

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Paper provided by LICOS - Centre for Institutions and Economic Performance, KU Leuven in its series LICOS Discussion Papers with number 9601.

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Length: 28 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:lic:licosd:9601
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  1. Sikken, Bernd Jan & de Haan, Jakob, 1998. "Budget Deficits, Monetization, and Central-Bank Independence in Developing Countries," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 493-511, July.
  2. Atish R. Ghosh & Anne-Marie Gulde & Holger C. Wolf, 2000. "Currency boards: More than a quick fix?," Economic Policy, CEPR;CES;MSH, vol. 15(31), pages 269-335, October.
  3. Fleming, Alex & Talley, Samuel, 1996. "The Latvian banking crisis : lessons learned," Policy Research Working Paper Series 1590, The World Bank.
  4. repec:imf:imfpdp:9601 is not listed on IDEAS
  5. Richard W. Kopcke, 1999. "Currency boards: once and future monetary regimes?," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 21-37.
  6. Eijffinger, S-C-W & de Haan, J, 1996. "The Political Economy of Central-Bank Independence," Princeton Studies in International Economics 19, International Economics Section, Departement of Economics Princeton University,.
  7. Eijffinger, Sylvester & Haan, Jakob de, 2000. "European Monetary and Fiscal Policy," OUP Catalogue, Oxford University Press, number 9780198776161, March.
  8. John Williamson, 1995. "What Role of Currency Boards?," Peterson Institute Press: Policy Analyses in International Economics, Peterson Institute for International Economics, number pa40, 03.
  9. Donal McGettigan, 2000. "Current Account and External Sustainability in the Baltics, Russia, and Other Countries of the Former Soviet Union," IMF Occasional Papers 189, International Monetary Fund.
  10. Berger, Helge & de Haan, Jakob & Eijffinger, Sylvester C W, 2000. "Central Bank Independence: An Update of Theory and Evidence," CEPR Discussion Papers 2353, C.E.P.R. Discussion Papers.
  11. Prakash Loungani & Nathan Sheets, 1995. "Central bank independence, inflation and growth in transition economies," International Finance Discussion Papers 519, Board of Governors of the Federal Reserve System (U.S.).
  12. repec:imf:imfpdp:9711 is not listed on IDEAS
  13. Iikka Korhonen, 2000. "Currency Boards in the Baltic Countries: What Have We Learned?," Post-Communist Economies, Taylor & Francis Journals, vol. 12(1), pages 25-46.
  14. Jeffrey A. Frankel, 1999. "No Single Currency Regime is Right for All Countries or At All Times," NBER Working Papers 7338, National Bureau of Economic Research, Inc.
  15. repec:imf:imfpdp:9710 is not listed on IDEAS
  16. repec:ner:tilbur:urn:nbn:nl:ui:12-82796 is not listed on IDEAS
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