Currency Boards, Credibility, and Macroeconomic Behavior
Electronic Access:
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Summary:
Currency boards operate differently from standard pegs. The former exhibit greater currency stability and lower transaction costs, inflation, and nominal interest rates, but are limited in their use of devaluation. We extend Drazen and Masson’s (1994) signaling model to consider the choice between currency board arrangements and standard pegs. The model shows that currency boards’ effectiveness hinges on their credibility properties and that they can improve welfare even with high unemployment persistence. By reducing expected inflation and the negative employment effect arising from expected but unrealized inflation, currency boards can produce less unemployment than peg regimes that abstain from devaluation.
Series:
Working Paper No. 2000/097
Subject:
Currencies Currency boards Exchange rate arrangements Foreign exchange Inflation Labor Money Prices Unemployment
English
Publication Date:
June 1, 2000
ISBN/ISSN:
9781451852011/1018-5941
Stock No:
WPIEA0972000
Pages:
45
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