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Monetary policy under currency board arrangements: An necessary flexibility for transition countries?

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  • Berensmann, Kathrin

Abstract

One of the main disadvantages of currency boards is the rule-based character of this system and the resulting inflexibility in case of shocks, a frequently recurring event in transition countries. Accordingly, central banks under currency board arrangements (CBA) are unable to respond to short-term liquidity changes in the money market. To cushion negative effects of economic shocks on interest rates and on the volatility of banks' liquidity the Estonian and Lithuanian central banks have to a limited extent used various monetary policy tools which, however, have neither undermined credibility of the central banks nor the ultimate goal of price stability. The most important instrument has been reserve requirements. Changes of the reserve requirement base, the reserve requirement ratio and several other rules to hold reserve requirements have affected the liquidity of the banking systems in both countries. The significance of reserve requirements becomes clear when reserve requirements are set in relation to the monetary base. Between 1998 and 2000 in Estonia this ratio even ranged between 40 and 50 percent and Lithuania this ratio amounted to about 20 percent during this period. Other instruments than reserve requirements played a minor role because the volume was small.

Suggested Citation

  • Berensmann, Kathrin, 2003. "Monetary policy under currency board arrangements: An necessary flexibility for transition countries?," W.E.P. - Würzburg Economic Papers 44, University of Würzburg, Chair for Monetary Policy and International Economics.
  • Handle: RePEc:zbw:wuewep:44
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    Keywords

    Monetary policy; currency board; exchange rate policy; transition economies;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • P20 - Economic Systems - - Socialist Systems and Transition Economies - - - General

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