BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 6/1999:
Currency Boards in the Baltic Countries: What Have We Learned?
Iikka Korhonen ()
Abstract: Straightforward exchange rate arrangements known as
currency boards have gained popularity during the past dec-ade. Among
transition economies, Estonia first introduced a currency board in 1992,
followed by Lithuania in 1994 and Bulgaria in 1997. Currency boards have
been useful in achieving macroeconomic stabilization, and they may have
helped the Baltics become the first countries of the former Soviet Union
(FSU) to achieve economic growth after the slump in production of the early
1990s. Moreover, Baltic inflation performance has been substantially better
than in other FSU countries. Both in Estonia and Lithuania, the present
exchange rate system has been ac-companied by strong real appreciation of
the currency. Both in Estonia and Lithuania the present exchange rate
system has been accompanied by strong real appreciation of the currency,
although it is widely accepted that the currencies were very much
undervalued at the beginning of their pegs. However, if rapid real
appreciation is ac-companied with increases in the labor productivity, the
present pegs can be maintained. Banking crises in Estonia and Lithuania
have not been particularly severe, so apparently rigid currency pegs have
not been accompanied by excessive financial sector instability. The tight
fiscal policies pursued in both countries, especially Estonia, have been
instrumental to the success of these currency board arrangements.
Keywords: exchange rate; currency board; Baltic countries; (follow links to similar papers)
JEL-Codes: E50; E60; P20; (follow links to similar papers)
43 pages, September 14, 1999
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