Currency Boards, Credibility, and Macroeconomic Behavior

IMF Working Papers, June 1, 2000

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Currency Boards, Credibility, and Macroeconomic Behavior

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Bibliographic details

• Authors: Amadou N Sy, Luis Rivera-Batiz
• Published: June 1, 2000
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451852011.001

Summary findings

• Currency boards operate differently from standard pegs.
• Currency boards exhibit greater currency stability and lower transaction costs, inflation, and nominal interest rates.
• Currency boards are limited in their use of devaluation.
• Currency boards 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.

Model and analytical approach

• Extension of 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.

Policy implications and mechanisms

• Credibility is central: the welfare and labor-market improvements from currency boards depend on their credibility properties.
• Lower expected inflation under currency boards reduces the negative employment effects that stem from expected but unrealized inflation.
• Currency boards may be preferable to peg regimes that abstain from devaluation when the objective includes reducing unemployment driven by inflation expectations.

Subject coverage and keywords

• Subject: Currencies, Currency boards, Exchange rate arrangements, Foreign exchange, Inflation, Labor, Money, Prices, Unemployment
• Keywords: Baltics, Credibility, Currencies, currency board, currency board peg, currency board structures, Currency boards, Currency Crisis, currency market bid-Ask, currency market spread, currency regime choice, East Asia, exchange rate, Exchange rate arrangements, Fixed Exchange Rate, Hong Kong currency board regime, Hong Kong dollar, Inflation, inflation stability, money market, regime choice, Singapore dollar, Thai baht, Unemployment, WP

Content in this bundle

• Currency Boards, Credibility, and Macroeconomic Behavior - WP/00/97
  • Currency Boards, Credibility, and Macroeconomic Behavior - WP/00/97 (Markdown version)
  • Currency Boards, Credibility, and Macroeconomic Behavior - WP/00/97 (PDF)