Fiscal Discipline and Stability Under Currency Board Systems

CER-ETH Working Paper No. 07/66

58 Pages Posted: 5 Apr 2007

See all articles by Oliver R. Grimm

Oliver R. Grimm

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

Date Written: March 2007

Abstract

In economic discussions, currency board systems are frequently described as arrangements with self-binding character to the monetary authorities by their strict rules and establishments by law. Hard pegs and especially currency boards are often seen as remedies to overcome economic and financial turmoils and to return to low inflation. A sustainable debt level closely linked to a disciplined fiscal policy is, however, a premise for medium-term success. We show in a two-period model that the choice of a currency board can increase fiscal discipline compared to a standard peg regime. We derive, furthermore, the conditions for a currency boards to gain a stability advantage compared to a common peg system.

Keywords: currency board, fixed exchange rate, commitment, inflation bias, fiscal discipline, public debt, time-inconsistency problem

JEL Classification: E52, E58, E62, F33

Suggested Citation

Grimm, Oliver R., Fiscal Discipline and Stability Under Currency Board Systems (March 2007). CER-ETH Working Paper No. 07/66, Available at SSRN: https://ssrn.com/abstract=977905 or http://dx.doi.org/10.2139/ssrn.977905

Oliver R. Grimm (Contact Author)

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

Zürichbergstrasse 18
Zurich, 8092
Switzerland

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