Currency board and dollarization 1 currency board only a few countries, mainly in europe, had central banks before the twentieth century. Most of the limited recent literature on currency boards comes from those. Britains example and suspended its currency board arrangement until the financial. A currency board is a monetary authority that issues notes and coins convertible into a foreign anchor currency or commodity also called the reserve currency at a truly fixed rate and on demand. Thus currency boards do not provide easy solutions.
Although a currency board is a simple monetary arrangement, there is a range of important policy issues that must be addressed by the domestic monetary authorities. Pros and cons of currency board arrangements in the leadup. Lithuania in 1994 to likewise institute a currency board williamson 1995, pp. The first currency board was set up in mauritius in 1849. The british colonies had a currency board arrangement, with the colonial currency pegged to, and more or less fully backed, by the. The board must maintain foreign currency reserves for all the currency that it has printed. In fixed exchange rate or currency board regimes, the exchange rate ceases to vary in relation to the reference currency. Design and operation of existing currency board arrangements.
Issues and experiences from the caribbean economies, applied econometrics and international development, euroamerican association of economic development, vol. The main qualities of an orthodox currency board are. It asks what defines a currency board arrangement, what are their. By stabilizing the exchange rate, he thought the economic. Issues and experiences from the caribbean economies chionis, dionysios democritus university of thrace, greek abstract although acurrency board is a imple monetarys arrangement, there is a range of important policy issues that must be addressed by the domestic monetary authorities. Argentinas currency board regime argentina maintained a fixed exchange rate currency regime from april 1, 1991 through january 6, 2002. Monetary operations under the currency board system. The experiences of three candidates for eu membership with cbas estonia, lithuania, and bulgaria have also been generally favorable. Arrangements that had performed relatively well for years think of indonesia and korea came crashing down with almost no advance notice. Regional currency areas and the use of foreign currencies. However, they raise at least three broad questions. A read is counted each time someone views a publication summary such as the title, abstract, and list of authors, clicks on a figure, or views or downloads the fulltext. In 1991 argentina and in 1992 estonia adopted currency board arrangements.
The colonial currency boards thus did not include mon. October 6, 2016 abstract the effects of the european economic and monetary union emu and european union eu on trade are separately estimated using. If youre looking for a free download links of currency board arrangements. The rise and fall of argentinas currency board shows the extent to which the advantages of hard pegs have been overstated. The currency board countries were required to observe a number of rules, as was the case under the gold standard system. Under a currency board arrangement, the board agrees to supply or redeem local currency bank notes and, if applicable, reserve deposits of commercial banks. Other building blocks, which may be more mediumterm, may go beyond adjustments to. Currency board arrangements cbas have undergone a revival. Exchange rate regimes for emerging market economies.
Moreover, there are thorny issues, asyet untested, regarding possible exits from a currency board. Policy misalignments of the currency board arrangements. This paper documents the major policy reforms hong kongs linked exchange to rate system lers that have enabled it to evolve into thehighly credible, efficient, and transparent system today. Historically, countries with currency board arrangements cbas have experienced lower inflation and higher growth than those with other regimes. Us investors to demand more gbp to purchase uk securities outward shift in the demand curve for gbp from d0d0 to d1d1. Eventually, they have been introduced in this decade in argentina, estonia, lithuania, bulgaria.
Stimulated by kydland and prescott 1977, there have been numerous studies on the relative merit of rules versus discretion in macroeconomic policies. Federal reserve board digital currencies, stablecoins, and. Types of exchange rate systems financial management. Can currency boards prevent devaluations and financial meltdowns. An orthodox currency board typically does not accept deposits. Under this framework, the use of monetary policy is very restricted, and under the strict currency board, a government cannot operate any monetary policy at all. The renewed interest in currency boards has come in several waves, raising the number of countries currently using them to 14 see table. Dld does not refer exclusively to denomination in us dollars, as dld encompasses accounts denominated in internationally traded hard currencies such as the british pound. It asks what defines a currency board arrangement, what are their strengths and weaknesses, and what constraints they place on macroeconomic policies. All in all, the effect of the fixed regime on fiscal discipline challenges the. Argentinas currency board promised to convert each peso. A country devastated by civil war and foreign interference, bosniaherzegovinas currency board was. Introduction a currency board is an institutional arrangement for managing a currency with a fixed parity. The arrival of the euro widens monetary unions in africa.
If one defines policy misalignment as deviation from such policy rule then such mistakes have been associated with either external deficit or contradictory effects on gdp. Issues and experiences, by a staff team led by tomas j. Dld does not refer exclusively to denomination in us dollars, as dld encompasses accounts denominated in internationally traded hard currencies such as the british pound sterling, the swiss franc, the japanese yen, and. Unemployment gap in the currency board regime cbcg.
In three years, five currencies have depreciated by 20% or more against the most stable currencies in the ems. No 151, imf occasional papers from international monetary fund abstract. Issues and experiences occasional paper intl monetary fund pdf, epub, docx and torrent then this site is not for you. From the wide range of currency regimes, the choice of currency board has become very popular in the 1990s. Hard peg regimes, consisting of a currency board arrangements, under which the monetary authorities pledge to sell foreign currency for domestic currency on demand at a fixed rate, and back the domestic currency with foreign currency for this purpose, and b the unilateral official adoption of a foreign currency e. Argentina chose the currency board in 1991 and bosnia in 1997. Issues on the choice of exchange rate regimes and currency boards an analytical survey. A currency board is an extreme form of a pegged exchange rate, in which management of the exchange rate and the money supply are taken away from the central bank. Of those floating, 27 maintain a managed float and 48 an independent float. Federal reserve board the digitalization of payments and.
Contemporary exchange rate arrangements international. Currency board arrangements have recently undergone a revival, resulting in an increasing concern of economists and policy makers about the benefits and costs of currency boards. A high inflation problem is an important motivation for countries in transition to consider. For smaller economies, there may be material effects on monetary policy from privatesector digital currencies as well as foreign central bank digital currencies. Secondly, a currency board could not influence the formation of interest rates in the money market. The precise nature of the risk would be driven in part by how the stablecoin is tied to an asset if at all, the underlying legal arrangements, and the features of the asset itself. Four concerns prompted me, as monetary authority responsible amongst other things for the operation of the currency board arrangements in.
A currency board facilitates the stabilization of a countrys currency and maintains the confidence of foreign investors. In contrast, a special type of exchange rate arrangement, the currency board, has. The impact of currency fluctuations on the internal market communication from the commission to the european council foreword the european union has seen considerable currency fluctuations since the summer of 1992. Much like countries operating currency board systems, officially. Keynesian doctrine of the time emphasized the positive role of. As those issues go to the heart of many controversies about the best. Perhaps most instructive for burma of all the new wave currency board arrangements has been that of bosniaherzegovina. Pros and cons of currency board arrangements in the lead.
These rules are based on a monetary approach to the balance of payments which links balance of payments dynamics with reserve money dynamics. Federal reserve board digital currencies, stablecoins. Digital currencies, stablecoins, and the evolving payments landscape. I want to thank darrell duffie for inviting me to discuss the future of payments. Bulgaria introduced a currency board in 1997 as a mean of stabilization after the country experienced a prolonged period of a near hyperin ation and several unsuccessful stabilization policies. From reconstruction to accumulation for future generations, by nigel andrew chalk, mohamed a. In more sensational cases, currency pegs have crashed with spectacular, usually disastrous, consequences. Domestic liability dollarization dld refers to the denomination of banking system deposits and lending in a currency other than that of the country in which they are held. Vicepresident and director of the center for latin american economies. While this regime was formally termed a currency board, it is important to remember that argentinas monetary regime was not in fact an orthodox currency board.
Technology is driving rapid change in the way we make payments and in the concept of money. Since then, a strain of monetary evangelicals have urged their adoption anywhere and almost everywheresmost notably in mexico, russia, and ukraine. The study of hong kongs experiences with the currency board is of theoretical interest in its own right. By transforming payments, digitalization has the potential to deliver greater value and convenience at lower cost.
For instance, hong kong sar, djibouti, and dominica have such an arrangement with the. Hong kong has had a currency board since 1983 when its currency was linked to the us dollar. Following the successful use of a currency board to stabilize the economy in the aftermath of argentinas hyperinflation in 1991, additional attributes of currency boards became evident as a result of the successful efforts made by two transition economies. Bosnia and herzegovina and bulgaria are each about to establish one. A currency boards foreign currency reserves must be sufficient to ensure that all holders of its notes and coins and all bank creditors of a reserve account at the currency board can convert them into the reserve currency usually 110115% of the monetary base m0 a currency board maintains absolute, unlimited convertibility between. A currency board is expected to restore faith in the domestic currency. Bank reserve dynamics under currency board arrangement. The reasons for the disappearance of currency boards6 were manifold, but they can be summarized as follows schuler, 1992. A currency board is a monetary authority which is required to maintain a fixed exchange rate with a foreign currency. At the future of money in the digital age, sponsored by the peterson institute for international economics and princeton universitys bendheim center for finance, washington, d. In a dollarization regime, there is not really an exchange rate, given that the domestic currency ceases to exist.
Are currency boards a cure for all monetary problems. Jun 25, 2019 currency board a currency board is an extreme form of a pegged exchange rate. Today, efforts by global stablecoin networks such as facebooks libra to. In a pure currency board arrangement, the currency board has no margin to intervene as lender of last resort on behalf of a bank in difficulties or to engage in open market operations.
Zarazaga all three authors are economists at the research department of the federal reserve bank of dallas. Combining a traditional, rulebased exchange arrangement with legal and structural measures that addressed pressing banking sector and fiscal issues, it was. The federal reserve, the central bank of the united states, provides the nation with a safe, flexible, and stable monetary and financial system. Can cbas serve these transition countries well all the way up to the adoption of the euro. The currency board did provide nominal stability and boosted financial intermediation, at the cost of endogenous financial dollarization, but did not foster monetary or fiscal discipline. Cristina terra, in principles of international finance and open economy macroeconomics, 2015.
A currency board arrangement is more attractive if the imported foreign monetary policy is in. Currency board a currency board is an extreme form of a pegged exchange rate. This policy objective requires the conventional objectives of a central bank to be subordinated to the exchange rate target. Often, it has directions to back all units of domestic currency with foreign currency. The most recent argentine economic and political crisis began in 2001, when the authorities abandoned a decadelong currency board arrangement that tied the peso to the dollar at a onetoone exchange rate. The currency board is much more constrained than the central bank, and these constraints help ensure that the fixed parity is maintained. The efficiency of the currency board arrangement161 in the period from 1950s to early 1990s, the interest in monetary arrangements considerably diminished.
This paper provides a comprehensive analysis of the attractions and disadvantages of currency board arrangements in their various institutional configurations. Arrangements that replace independent national currencies regional currency areas, currency boards, official or unofficial use of a foreign currency have become increasingly popular. Currency board, in its pure form, is a rulebased system. A proposal for a currency board in a democratic burma. International monetary fund this paper provides a comprehensive analysis of the attractions and disadvantages of currency board arrangements in their various institutional configurations. Central banking did not became widespread in the americas until the period between the first and second world wars, and did not become widespread in africa and asia until after the second world war. America, revealed how little we still know about workable exchange rate policies for developing countries. Pdf the role of the currency board in bulgarias stabilization. Fixed exchange rate an overview sciencedirect topics. Currency board arrangement analysis carleton university.
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