Currency Boards, Credibility, and Macroeconomic Behavior

June 1, 2000

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Format: Chicago

Amadou N Sy, and Luis Rivera-Batiz. Currency Boards, Credibility, and Macroeconomic Behavior, (USA: International Monetary Fund, 2000) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Currencies, Currency boards, Exchange rate arrangements, Foreign exchange, Inflation, Labor, Money, Prices, Unemployment

Keywords: Baltics, Credibility, Currencies, Currency board, Currency board peg, Currency board structures, Currency boards, Currency Crisis, Currency market bid-Ask, Currency market spread, Currency regime choice, East Asia, Exchange rate, Exchange rate arrangements, Fixed Exchange Rate, Hong Kong currency board regime, Hong Kong dollar, Inflation, Inflation stability, Money market, Regime choice, Singapore dollar, Thai baht, Unemployment, WP

Publication Details

Pages:

45
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2000/097
Stock No:

WPIEA0972000
ISBN:

9781451852011
ISSN:

1018-5941

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