Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/22163
Authors: 
Feuerstein, Switgard
Grimm, Oliver
Year of Publication: 
2004
Series/Report no.: 
CeGE discussion paper 36
Abstract: 
The paper compares the credibility of currency boards and (standard) pegs. Abandoning a currency board requires a time-consuming legislative process and an abolition will thus be previously expected. Therefore, a currency board solves the time inconsistency problem of monetary policy. However, policy can react to unexpected shocks only with a time lag, thus the threat of large shocks makes the abolition more likely. Currency boards are more credible than standard pegs if the time inconsistency problem dominates. In contrast, standard pegs, that can be left at short notice, are more credible if exogenous shocks are highly volatile and constitute the dominant problem.
Subjects: 
monetary policy
currency board
standard peg
credibility
time inconsistency problem
stochastic purchasing power parity
JEL: 
F33
E52
E42
Document Type: 
Working Paper

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