The Efficiency of the Currency Board Arrangement

The currency board arrangement has a relatively long history and it originated in the British colonies. In the period after the World War II, the interest in this arrangement died down, but it was revived with the initiation of the transition process in Eastern Europe, when the number of countries in this arrangement increased. The currency board arrangement has an influence on fast disinflation, but there is a dilemma about its performance in relatively stable conditions. The purpose of this paper is to make the comparison of selected performance (inflation and the current account deficit) of countries under the currency board arrangement with countries using other exchange rate arrangements, relying on the example of European economies in transition. This paper confirms assumptions of the theory that countries under the floating exchange rate arrangement have the lowest current account deficits (measured as a percentage of GDP), while the countries under the currency board arrangement have significantly higher deficits. Contrary to expectations, it turned out that the rate of inflation is lower in countries under the floating exchange rate arrangement when compared to other countries under the currency board arrangement, which indicates a lower efficiency of this arrangement in a stable environment.