WP/OO/199 IMF Working Paper Dual Currency Boards: A Proposal for Currency Stability Stefan Erik Oppers INTERNATIONAL MONETARY FUND © 2000 International Monetary Fund WP/OO/199 IMF Working Paper Office in Europe Dual Currency Boards: A Proposal for Currency Stability Prepared by Stefan Erik Oppersl Authorized for distribution by Flemming Larsen December 2000 Abstract 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 progrcss by the author(s) and are published to elicit comments and to further debate. This paper shows that extending the convertibility guarantee of the traditional currency board to a second reserve currency brings about an automatic, market-driven change of the peg when the initial reserve currency appreciates beyond a specified level. The "dual" currency board thus maintains the advantages of a hard peg, but avoids the economic difficulties associated with the link to an overvalued reserve currency. As an added benefit, the system has the potential to promote global currency stability, with the reserves of the dual currency board country acting as a buffer stock to the exchange cross-rate of the chosen reserve currencies. JEL Classification Numbers: E58, F33 Keywords: Exchange rate regimes, fixed exchange rates, currency board Author's e-mail Address:
[email protected] 1 I would like to thank Tamim Bayoumi for providing initial ideas on how my previous research on bimetallism could be applied to currency boards, and for subsequent helpful comments and discussions. I am also indebted to Michael Bordo, Eduardo Borensztein, Barry Eichengreen, and Sergio Leite for helpful comments on earlier drafts.