Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/48456 
Year of Publication: 
2003
Series/Report no.: 
W.E.P. - Würzburg Economic Papers No. 44
Publisher: 
University of Würzburg, Department of Economics, Würzburg
Abstract: 
One of the main disadvantages of currency boards is the rule-based character of this system and the resulting inflexibility in case of shocks, a frequently recurring event in transition countries. Accordingly, central banks under currency board arrangements (CBA) are unable to respond to short-term liquidity changes in the money market. To cushion negative effects of economic shocks on interest rates and on the volatility of banks' liquidity the Estonian and Lithuanian central banks have to a limited extent used various monetary policy tools which, however, have neither undermined credibility of the central banks nor the ultimate goal of price stability. The most important instrument has been reserve requirements. Changes of the reserve requirement base, the reserve requirement ratio and several other rules to hold reserve requirements have affected the liquidity of the banking systems in both countries. The significance of reserve requirements becomes clear when reserve requirements are set in relation to the monetary base. Between 1998 and 2000 in Estonia this ratio even ranged between 40 and 50 percent and Lithuania this ratio amounted to about 20 percent during this period. Other instruments than reserve requirements played a minor role because the volume was small.
Subjects: 
Monetary policy
currency board
exchange rate policy
transition economies
JEL: 
E42
E52
F33
F41
P20
Document Type: 
Working Paper

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