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In contrast to central banks, currency boards are rule-bound monetary institutions without discretionary monetary policies. Currency boards first appeared in the mid-nineteenth century, were widespread prior to World War II, were replaced by central banks after the war, & have made something of a resurgence in the 1990s. This article discusses the distinguishing features of currency boards & central banks. Data that compare the performance of currency boards to that of central banks are presented. The arguments against currency boards are itemized & evaluated. The article concludes that the opposition to currency boards ignores the empirical evidence & is, at best, half baked. In developing countries, currency boards are superior to central banks. By applying a remediableness criterion, the article concludes that there are more than sixty countries that should replace their central banks with currency boards. 9 Tables, 43 References. [Copyright 2002 Sage Publications, Inc.]

The paper shows that the traditional wisdom of raising interest rates to defend a currency enriches rather than punishes the speculators. Furthermore, using high interest rates as a currency defense tool often produces the opposite effect in times of crisis. A new approach is proposed of using Hong Kong dollar "put" options as an explicit commitment by the government. The put option itself acts like an intertemporal currency board in keeping the linked exchange rate over time. This costly signaling produces a separating equilibrium that distinguishes the strength of the Hong Kong dollar from the other Asian currencies that were under pressure in 1997.

The breakdown of the Argentine currency board in early 2002 produced a number of obituaries that often quite rashly declared the country's monetary constitution since 1991 the main responsible for its recent near-catastrophic economic collapse. Contrary to such rather one-sided negative ascriptions to the currency board system, the intention of this paper is to give a comprehensive and balanced description of the currency board model in theory, as well as to name its functioning conditions under today's economic and political conditions prevailing in developing and transforming countries. It will become clear that the success of a currency board in terms of lasting stabilization of an economy not only depends on its initial design (e.g. the choice of the anchor currency, of the exchange rate, the legal and institutional fixings) but also on an ongoing process of economic and institutional reform that extends from a general macroeconomic and especially public sector streamlining to banking sector reforms, product and labour market deregulation, and to a general realignment of the economy towards exportorientation and international competitiveness. The extent to which these reforms are tackled and completed decides over the degree to which the economy is able to absorb real shocks without incurring high economic and social adaptation costs, hence over the degree to which a country is able to benefit from the currency board's strengths without falling victim to its potentially severe weaknesses. Along with some basic reflections about the concept and motivation of modern currency boards, sections 1-3 give a brief overview over the historical background of the currency board idea as well as of its implementation. Section 4 focuses on the constitutional elements of a currency board, while section 5 provides the core of the discussion of pros and cons of currency boards, depicting the system's strengths and weaknesses as well as the conditions under which they materialize. Section 6 will discuss under which circumstances a currency board is a good choice for a country, and ask whether less strict stabilization policies might be able to deliver the hoped-for benefits less costly. Some problems related to the questions of duration and termination of currency boards are addressed in section 7. Finally, section 8 will give a brief exposition of the idea of dual currency boards as a theoretical extension of the currency board model which promises to eliminate one of the biggest immanent threats to a currency board.

Le currency board est souvent présenté comme la seule organisation monétaire permettant une convertibilité au pair d'une monnaie nationale en une monnaie de réserve. Ce système cumule deux défauts, le maintien du risque de change et l'absence de prêteur en dernier ressort, même si le premier inconvénient est censé disparaître avec le second. Cet article évoque une alternative au currency board, ainsi qu'à la dollarisation officielle parfois proposée pour supprimer définitivement le risque de change. Cette alternative issue de la théorie de la Banking School et que nous appelons banking board permet de doter le système d'un prêteur en dernier ressort tout en supprimant le risque de change.

The 1990s saw a revival of the currency board system, and proponents have advocated it as an easy-to-set-up exchange rate arrangement providing effective stabilization of the economy. However, the experience of Argentina has highlighted the risks of having a currency board. This study presents both the potential benefits, as well as the risks, of having a currency board by examining the stability of the currency board arrangement and identifying factors affecting the stability. The analysis is based on second-generation currency crisis models, extended to incorporate currency-board specific features and to account for particular aspects often found in currency-board economies.

The 1990s saw a revival of the currency board system, and proponents have advocated it as an easy-to-set-up exchange rate arrangement providing effective stabilization of the economy. However, the experience of Argentina has highlighted the risks of having a currency board. This study presents both the potential benefits, as well as the risks, of having a currency board by examining the stability of the currency board arrangement and identifying factors affecting the stability. The analysis is based on second-generation currency crisis models, extended to incorporate currency-board specific features and to account for particular aspects often found in currency-board economies.

Currency risk is one of the two components of the total interest rate differential. Hard pegs, such as currency boards, are meant to reduce or even eliminate currency risk, thus reducing domestic interest rates. This paper investigates the patterns and determinants of the currency risk premium in two currency boards - Argentina and Hong Kong. Despite the presumed rigidity of currency boards, the currency premium is almost always positive and at times very large. Its term structure is usually upward sloping, but flattens out or even becomes inverted at times of turbulence. The premium and its term structure depend on domestic and global factors, related to devaluation expectations and risk perceptions. (DSE/DÜI)

Currency boards, more so than other exchange rate regimes, have come in and out of fashion. Defined by a fixed exchange rate with full convertibility, central bank liabilities backed with foreign exchange reserves, and a high cost of exiting the regime, currency boards were common in colonial times--until most were cast off as countries gained independence after World War II. In the 1990s, currency boards enjoyed a revival as the cornerstone of various macroeconomic stabilization programs--including many in central and eastern European transition economies--only to fall into disfavor again with the collapse of the Argentine regime in 2002. The authors of Currency Boards in Retrospect and Prospect take a balanced look at the effects of currency board regimes on inflation, output growth, and macroeconomic performance more generally. - Drawing on historical experience, economic theory, cross-country empirical analysis, and case studies of currency boards in Argentina, Estonia, Lithuania, Bulgaria, and Bosnia and Herzegovina, the authors conclude that currency boards deliver significant reductions in inflation compared to other regimes and do not seem to result in slower growth or a markedly higher vulnerability to crisis.