Unemployment Gap in the Currency Board Regime

Novak Kondić () and Borivoje D. Krušković ()
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Novak Kondić: Economics Faculty in Banja Luka
Borivoje D. Krušković: Economics Faculty in Banja Luka

Journal of Central Banking Theory and Practice, 2013, vol. 2, issue 3, 71-84

Abstract: A currency board combines three elements: a fixed exchange rate between a country’s currency and an “anchor currency,” automatic convertibility, and a long-term commitment to the system, often made explicit in the central bank law. The main reason for countries to consider a currency board is to demonstrate that they are pursuing an anti-inflationary policy. The mechanism works through changes in the money supply, which lead to interest rate changes, which, in turn, encourage funds to move between the domestic and the anchor currency. This is essentially the same mechanism that operates under a fixed exchange rate, but the exchange rate guarantee implied in the currency board rules ensures that the necessary interest rate changes and the attendant costs for the economy will be comparatively lower.

Keywords: currency board; exchange rate; devaluation; inflation (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
Date: 2013
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