Currency Boards, Credibility, and Macroeconomic Behavior

Author/Editor:

Amadou N Sy ; Luis Rivera-Batiz

Publication Date:

June 1, 2000

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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. 00/97

Subject:

English

Publication Date:

June 1, 2000

ISBN/ISSN:

9781451852011/1018-5941

Stock No:

WPIEA0972000

Format:

Paper

Pages:

45

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