Aspects of the Sustainability of Estonian Currency Board Arrangement

Urmas Sepp and Martti Randveer ()

No 2002-05, Bank of Estonia Working Papers from Bank of Estonia

Abstract: The main aim of the paper is to examine different aspects of the sustainability of Estonian CBA. For this purpose the paper gives an overview of CBA in general, describes the rationale for the choice of the CBA in Estonia and uses model simulations to assess its sustainability. It also analyses whether the preconditions for the successful performance of the CBA are in place in Estonia and discusses the compatibility of Estonian CBA to the EMU and ERM 2. The analysis in the paper shows that CBA is a suitable exchange rate regime for Estonia. It is argued that the preconditions for a well-functioning CBA - resilient financial sector, flexible wage and employment system and prudent fiscal policy - are in place. The sustainability of the CBA is also supported by model simulations, which show that shocks hitting Estonian economy do not cause convergence of the Estonian economy from the long-run path. Based on the above-mentioned results, the paper concludes that the currency board arrangement is the best exchange rate regime for Estonia before the full participation in the third stage of the EMU.

Pages: 56 pages
Date: 2002-10-10, Revised 2002-10-11
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mon
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