On the Credibility of Currency Boards
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 well-anticipated. 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. Copyright © 2006 The Authors; Journal compilation © 2006 Blackwell Publishing Ltd.
Year of publication: |
2006
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Authors: | Feuerstein, Switgard ; Grimm, Oliver |
Published in: |
Review of International Economics. - Wiley Blackwell, ISSN 0965-7576. - Vol. 14.2006, 5, p. 818-835
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Publisher: |
Wiley Blackwell |
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