Pros and Cons of Currency Board Arrangements in the Lead-Up to EU Accession and Participation in the Euro Zone

Abstract

Historically, countries with currency board arrangements (CB As) have experienced lower inflation and higher growth than those with other regimes. The experiences of three candidates for EU membership with CB As (Estonia, Lithuania, and Bulgaria) have also been generally favorable. Can CBAs serve these transition countries well all the way up to the adoption of the euro? After considering the pros and cons, this paper provides an affirmative answer, but notes that to preserve the viability of their CBAs throughout the process, these countries need to maintain strict policy discipline and be prepared to deal with large capital inflows and asymmetric shocks.

Decomposing Financial Risks and Vulnerabilities in Eastern Europe

“…Other conditions include sound export performance and competitive (albeit appreciating) real exchange rates, owing to on-going productivity growth and economic reforms. Gulde, Kähkönen, and Keller (2000) concluded that, in general, countries with currency board arrangements (CBA) have experienced lower inflation and higher growth than countries with floating rates and simple pegs. They suggest that it may be possible to go directly from CBA to the European monetary union, given a conservative fiscal stance, a healthy financial system, cautious external debt management, and flexible labor markets.…”

An Institutional Framework for Comparing Emerging Market Currency Boards

“…Information would be derived from given statutory provisions and any subsequent policy announcements, whether in conformity with or in contradiction of preannounced policy commitments. The literature on credibility refers to a Nash equilibrium outcome, where the policymaker takes the forward-looking private sector expectations as given, under incentive constraints on optimal and consistent policymaking.11Gulde, Kahkonen, and Keller (2000) review the performance of the Baltic states and Bulgaria. They state (on…”

Exchange Rate Regimes in Selected Advanced Transition Economies

“…The narrow band regime, together with fairly firm control over short-term capital flows, provides an anchor for the authorities' objective of reducing inflation from its current level of about 10 percent, while allowing some monetary policy flexibility for reacting to shocks. This approach to disinflation has become quite credible in recent years, For more discussion, see Guide, Kahkonen, and Keller (2000), ©International Monetary Fund. Not for Redistribution -21with reductions in the rate of exchange rate crawl reflected in a steady decline in inflation.…”