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Currency Boards Database CURRENCY Table 1 Recently established currency boards, main features BOARDS Year of Anchor Liabilities to Backing rule Country introduction currency be backed in % At the beginning of the twentieth Hong Kong 1983 US dollar Certificates of 25 century most countries in the indebtedness world, including colonies for that Argentina 1991; system US dollar Monetary base 55 was aban- matter, tried to hold inflation in doned in 2002 check not by central banks – Estonia 1992 Originally Kroons in 100 which they did not have – but by deutsche mark, circulation later euro currency boards. (Keeping to the Lithuania 1994 Originally Litas in 100 rules of the gold standard is a spe- US dollar, circulation cial case of a currency board.) later euro During the course of the century, Bosnia and 1997 Originally Aggregate 100 however, most currency boards Herzegovina deutsche mark, monetary later euro liabilities were abandoned and turned into Bulgaria 1997 Originally Aggregate 60 central banks. A wave of dissolu- deutsche mark, monetary tion of currency boards occurred later euro liabilities with the political independence Source: Compiled from Ho (2002) and recent information from Bank for of former European colonies in International Settlements. Asia and Africa. But some cur- rency boards have survived to this day, for example in and Herzegovina and Bulgaria – created currency Bermuda, Brunei, the Cayman Islands, Djibouti, the boards. Falkland Islands, the Faroe Islands or Gibraltar. The present-day currency boards, however, are not a The second part of the twentieth century witnessed “pure” or “orthodox” type. A pure currency board is a certain revival of currency boards (Table 1). Hong something like a “rule-based money-changing Kong started in 1983. Argentina followed eight machine” (Ho) only, operated by an administration, years later, but stopped the whole project in 2002. not by a central bank. Indeed, a central bank does not From 1992 to 1997 four Central- and South-eastern even exist. This implies that there is neither active, let European countries – Estonia, Lithuania, Bosnia alone discretionary, monetary pol- icy, nor a lender of last resort capa- Table 2 bility. By contrast, modern-day Recently established currency boards, operational features currency boards are, most often, operated by central banks, do Country Liquidity management Lender of last resort some liquidity management and Hong Kong No reserve requirements for Hong Kong Monetary banks, but overnight and Authority; dispose of the possibilities to act as intraday repo scope: systemic purposes lender of last resort (Table 2). Argentina 20% reserve requirement for Central Bank of Argentina; banks’ deposits, overnight scope: extraordinary repo circumstances However, the present-day “qua- si-currency boards” are currency Estonia 10% reserve requirement for Bank of Estonia; banks’ deposits, standing no explicit reference to boards at least insofar as, first, deposit facilities lender of last resort duties nor the national monetary base is capabilities strictly backed (albeit to differ- Lithuania 8% reserve requirement for The Bank of Lithuania; banks’ deposits, overnight no explicit reference to ent degrees) by reserves of the lending lender of last resort duties nor anchor currency, and second, capabilities there is a passive (on demand) Bosnia and 10% reserve requirement for –; change of national into foreign Herzegovina banks’ deposits extending credit by money creation forbidden currency at a prescribed fixed Bulgaria 8% reserve requirement for Banking department; exchange rate.The national mon- banks’ deposits scope: systemic risk etary base can only expand by a Source: Compiled from Ho (2002) and recent information from Bank for surplus in the balance of pay- International Settlements. ments. Thus, such an arrange- 73 CESifo DICE Report 1/2007 Database ment is an effective means to keep inflation at low levels – more exactly: at the level of the anchor cur- rency. Moreover, a currency board (in contrast to cir- culating foreign currency in the domestic economy, for example, “dollarisation”) creates some seignior- age revenues. But there are drawbacks too: International de- and revaluations of the foreign anchor currency are passed on to the local currency (one of the reasons why the Argentina currency board experiment failed). The same applies to the interest level which differs only by a risk factor between anchor and local currency. Finally, due to the lack of monetary-y poli- cy instruments like setting the discount rate or influ- encing the money supply, wages and prices must be relatively flexible (especially downwards) in order to avoid a severe recession. Currency boards today exist mainly in small (often former colonial) countries and in countries that have undergone fundamental systemic reforms. In a small open economy a currency board does not really limit the possibilities for monetary management because in practice they do not exist for such countries. A reform economy, whether big or small, can credibly commit itself to monetary stability by following the rules of a currency board. R.O. Reference Ho, C. (2002), “A Survey of the Institutional and Operational Aspects of Modern-day Currency Boards”, Bank for International Settlements Working Paper 110. CESifo DICE Report 1/2007 74.
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