Fiscal Discipline and Stability under Currency Board Systems

Oliver Grimm

No 07/66, CER-ETH Economics working paper series from CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich

Abstract: In economic discussions, currency board systems are frequently described as arrangements with self-binding character to the monetary authorities by their strict rules and establishments by law. Hard pegs and especially currency boards are often seen as remedies to overcome economic and financial turmoils and to return to low inflation. A sustainable debt level closely linked to a disciplined fiscal policy is, however, a premise for medium-term success. We show in a two-period model that the choice of a currency board can increase fiscal discipline compared to a standard peg regime. We derive, furthermore, the conditions for a currency boards to gain a stability advantage compared to a common peg system.

Keywords: currency board; fixed exchange rate; commitment; inflation bias; fiscal discipline; public debt; time-inconsistency problem (search for similar items in EconPapers)
JEL-codes: E52 E58 E62 F33 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2007-03
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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