On the Credibility of Currency Boards

18 Pages Posted: 27 Oct 2006

See all articles by Switgard Feuerstein

Switgard Feuerstein

University of Erfurt - Economics, Law, and Social Sciences

Oliver R. Grimm

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

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.

Suggested Citation

Feuerstein, Switgard and Grimm, Oliver R., On the Credibility of Currency Boards. Review of International Economics, Vol. 14, No. 5, pp. 818-835, November 2006, Available at SSRN: https://ssrn.com/abstract=940491 or http://dx.doi.org/10.1111/j.1467-9396.2006.00621.x

Switgard Feuerstein (Contact Author)

University of Erfurt - Economics, Law, and Social Sciences ( email )

Internationales Buro
Nordhaeuser Str. 63
D - 99089 Erfurt
Germany

Oliver R. Grimm

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

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