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Currency Boards, Credibility, and Macroeconomic Behavior

Author

Listed:
  • Luis A. Rivera-Batiz

    (University of Puerto Rico)

  • Amadou N. R. Sy

    (Inter American Development Bank
    McGill University
    Universitat Pompeu Fabra
    Research Department, IMF)

Abstract

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.

Suggested Citation

  • Luis A. Rivera-Batiz & Amadou N. R. Sy, 2013. "Currency Boards, Credibility, and Macroeconomic Behavior," Annals of Economics and Finance, Society for AEF, vol. 14(2), pages 831-870, November.
    • Handle: RePEc:cuf:journl:y:2013:v:14:i:3:sy
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    References listed on IDEAS

    as
    1. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
    2. Allan Drazen & Paul R. Masson, 1994. "Credibility of Policies Versus Credibility of Policymakers," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(3), pages 735-754.
    3. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    4. Edward, Sebastian, 1986. "Are Devaluations Contractionary?," The Review of Economics and Statistics, MIT Press, vol. 68(3), pages 501-508, August.
    5. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    6. Mr. Jonathan David Ostry & Ms. Anne Marie Gulde & Mr. Atish R. Ghosh & Holger C. Wolf, 1995. "Does the Nominal Exchange Rate Regime Matter?," IMF Working Papers 1995/121, International Monetary Fund.
    7. Mr. Charles Enoch & Mr. Tomás J. T. Baliño, 1997. "Currency Board Arrangements: Issues and Experiences," IMF Occasional Papers 1997/005, International Monetary Fund.
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    Citations

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    Cited by:

    1. Feng, Shu & Fu, Liang & Ho, Chun-Yu & Alex Ho, Wai-Yip, 2023. "Political stability and credibility of currency board," Journal of International Money and Finance, Elsevier, vol. 137(C).
    2. Daianu, Daniel & Vranceanu, Radu, 2003. "Subduing High Inflation In Romania. How To Better Monetary And Exchange Rate Mechanisms?," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 5-36, September.
    3. Spiegel, Mark M. & Valderrama, Diego, 2003. "Currency boards, dollarized liabilities, and monetary policy credibility," Journal of International Money and Finance, Elsevier, vol. 22(7), pages 1065-1087, December.
    4. Gregor Irwin, 2001. "Currency Boards and Currency Crises," Economics Series Working Papers 65, University of Oxford, Department of Economics.
    5. Fuchun Jin, 2002. "A Model to Analyze the Macroeconomic Interdependence of Hong Kong with China and the United States," Working Papers 062002, Hong Kong Institute for Monetary Research.
    6. Nikolay Nenovsky & Kalina Dimitrova, 2002. "Dual Inflation Under the Currency Board: The Challenges of Bulgarian EU Accession," William Davidson Institute Working Papers Series 487, William Davidson Institute at the University of Michigan.
    7. Emil Kalchev, 2015. "The Currency Board In Bulgaria – Staus Quo And Perspectives," Economy & Business Journal, International Scientific Publications, Bulgaria, vol. 9(1), pages 554-562.
    8. Urmas Sepp & Raoul Lättemäe & Martti Randveer, 2002. "The History and Sustainability of the CBA in Estonia," Macroeconomics 0212002, University Library of Munich, Germany.
    9. Ying Wu, 2005. "Determining a Modified Currency Board's Two-Period Exchange Rate Strategy," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 11(4), pages 347-357, November.
    10. Schmukler, Sergio L. & Serven, Luis, 2002. "Pricing currency risk under currency boards," Journal of Development Economics, Elsevier, vol. 69(2), pages 367-391, December.
    11. Schmukler, Sergio L. & Serven, Luis, 2002. "Pricing currency risk : facts and puzzles from currency boards," Policy Research Working Paper Series 2815, The World Bank.
    12. George Viksnins, 2000. "Baltic monetary regimes in the XXI st century," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 35(5), pages 213-218, September.
    13. repec:kap:iaecre:v:11:y:2005:i:4:p:347-357 is not listed on IDEAS

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    More about this item

    Keywords

    Credibility; Currency Board; Currency Crisis; Fixed Exchange Rate;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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