On the Credibility of Currency Boards

Switgard Feuerstein and Oliver Grimm

No 36, University of Göttingen Working Papers in Economics from University of Goettingen, Department of Economics

Abstract: The paper compares the credibility of currency boards and (standard) pegs. Abandoning a currency board requires a time-consuming legislative process and an abolition will thus be previously expected. Therefore, a currency board solves the time inconsistency problem of monetary policy. However, policy can react to unexpected shocks only with a time lag, thus the threat of large shocks makes the abolition more likely. Currency boards are more credible than standard pegs if the time inconsistency problem dominates. In contrast, standard pegs, that can be left at short notice, are more credible if exogenous shocks are highly volatile and constitute the dominant problem.

Keywords: monetary policy; currency board; standard peg; credibility; time inconsistency problem; stochastic purchasing power parity (search for similar items in EconPapers)
JEL-codes: E42 E52 F33 (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: On the Credibility of Currency Boards* (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cegedp:36

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