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  Review of International EconomicsVolume 14 Issue 5, Pages 818 - 835 Published Online: 26 Oct 2006 © 2010 Blackwell Publishing Ltd International Economics and Finance Society
Abstract | References | Full Text: HTML, PDF (Size: 308K) | Related Articles | Citation Tracking  On the Credibility of Currency Boards* * We thank Helge Berger, Hans Gersbach, Jochen Michaelis, and an anonymous referee for helpful comments. We also benefited from discussions at conferences in Göttingen (Workshop for International Economics), Warsaw (Spring Meeting of Young Economists), Madrid (European Economic Association), Strasbourg (Symposium on Banking and Monetary Policy), and Bonn (German Economic Association). Copyright © 2006 The Authors; Journal compilation © 2006 Blackwell Publishing Ltd 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 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. | 
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IT'S TIME TO RENEW
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