Currency Boards, Credibility, and Macroeconomic Behavior

46 Pages Posted: 2 Oct 2000

See all articles by Amadou Nicolas Racine Sy

Amadou Nicolas Racine Sy

International Monetary Fund (IMF) - International Capital Markets Department; Brookings Institution

Luis A. Rivera-Batiz

Universidad de Puerto Rico - Graduate School of Business Administration

Date Written: June 2000

Abstract

Currency boards operate differently from standard pegs. The former exhibit greater currency stability and lower transaction costs, inflation, and nominal interest rates, but are limited in their use of devaluation. We extend Drazen and Masson's (1994) signaling model to consider the choice between currency board arrangements and standard pegs. The model shows that currency boards' effectiveness hinges on their credibility properties and that they can improve welfare even with high unemployment persistence. By reducing expected inflation and the negative employment effect arising from expected but unrealized inflation, currency boards can produce less unemployment than peg regimes that abstain from devaluation.

Keywords: credibility, currency board, currency crisis, fixed exchange rate

JEL Classification: F31, F33

Suggested Citation

Sy, Amadou Nicolas Racine and Rivera-Batiz, Luis A., Currency Boards, Credibility, and Macroeconomic Behavior (June 2000). IMF Working Paper No. 00/97, Available at SSRN: https://ssrn.com/abstract=235059 or http://dx.doi.org/10.2139/ssrn.235059

Amadou Nicolas Racine Sy (Contact Author)

International Monetary Fund (IMF) - International Capital Markets Department ( email )

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Brookings Institution ( email )

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Luis A. Rivera-Batiz

Universidad de Puerto Rico - Graduate School of Business Administration ( email )

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00931-3300
Puerto Rico

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