Institutional arrangements of Currency Boards - Comparative Macroeconomic Analysis

This paper is concentrated on the comparative macroeconomic analysis of the differences stemming from the extent to which the institutional framework of the currency board arrangement is implemented in the legal and regulatory systems in the different countries. The main objective of taking into consideration and examining the currency board institutional arrangements is to distinguish between the impact that currency board countries and countries with pegged exchange rate have on different macroeconomic indicators. During the analysis of these two extreme representatives of the fixed exchange rate mechanism, a third group of countries naturally emerges, which consists of countries acting like currency boards but without official, legal implementation of this arrangement. Once the distinction among all 22 countries taken into consideration had been made, the main scope of the analysis concentrates on the econometric estimation of the currency boards' effects over inflation, nominal and real interest rates and economic growth in countries under currency board and all other pegged exchange rate economies. The main hypothesis to be tested is whether the implementation of currency board arrangement results in lower inflation, lower nominal and real interest rates and better economic growth. In the course of carrying out a thorough empirical research, the hypothesis turns out to be true as the currency board countries exhibit almost 3% lower annual inflation differential when putting them against the other pegged exchange rate systems, and 1% point advantage over the countries similar to currency boards. On average, countries with currency boards showed higher economic growth, fact that can be even surprising taking into consideration the inabilities of the monetary authorities to intervene heavily on the market and neutralise the negative effects of various external shocks.