Currency Boards - More than a Quick Fix?

The historical track record of currency boards is impressive, with few instances of speculative attacks and virtually no ‘involuntary’ exits. Modern currency boards have often been instituted to gain credibility following a period of high or hyperinflation and, in this respect, have been remarkably successful. Countries with currency boards experienced lower inflation and higher (if more volatile) GDP growth compared to both floating regimes and simple pegs. These three conclusions emerge from a major study by Atish R Ghosh (IMF), Anne-Marie Gulde (IMF) and Holger C Wolf (George Washington University and NBER). Their work appears in the latest edition of Economic Policy, published by three major European economic research organisations. 

Once a popular colonial monetary arrangement, currency boards fell into disuse as countries gained independence. Countries that did exit from currency boards did so mainly for political, rather than economic, reasons and such exits were usually uneventful. But recently, currency boards have made a remarkable comeback. The good performance on inflation reflects both a lower growth rate of money supply (a ‘discipline effect’) and a faster money demand growth (a ‘credibility effect’). The GDP growth effect is also significant, but may simply reflect a rebound from depressed levels. Case studies suggest that the successful introduction of a currency board requires lengthy legal and institutional changes, as well as a broad economic and social consensus for the implied commitment. Moreover, there are thorny issues, as yet untested, regarding possible exits from a currency board. Thus, currency boards do not provide any easy solutions. But if introduced in the right circumstances, with some built-in flexibility, they can be an important tool for gaining credibility and achieving macroeconomic stabilisation.

Notes for Editors:

Economic Policy is published in Association with the European Economic Association by the Centre for Economic Policy Research, the Centre for Economic Studies of the University of Munich and the Département et Laboratoire d’Economie Théorique et Appliquée (DELTA), in collaboration with the Maison des Sciences de l’Homme.

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The Authors:

Atish R Ghosh and Anne-Marie Gulde are based at the International Monetary Fund and Holger C Wolf is Assistant Professor at George Washington University and a Researcher at NBER.

Economic Policy Issue 31

Including Atish R Ghosh, Anne-Marie Gulde and Holger C Wolf
Currency Boards: More Than a Quick Fix?

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