Download Iceland`s Crisis

Iceland’s Crisis and
Response: Devising an
Exit Strategy
John Greenwood
Chief Economist, Invesco
November 2008
.
OUTLINE
ICELAND’S CRISIS
• What Went Wrong
• What Needs Fixing
THE CHOICE OF MONETARY REGIME
• Floating, Managed, Fixed, or Adopt the Euro?
• The Optimum for Iceland
FINANCIAL SUPERVISION
• Act as Shock Absorber
• Banks & Non-Banks
2
Iceland’s Crisis – What went wrong?
Problems with the Monetary Regime
• Huge carry trade inflows 2003-06
• Excessive growth of domestic credit
• Large current account deficit
Problems with Financial Supervision
• Private sector financial balance:
deficit of over 30% of GDP
• Banks’ overseas expansion excessively
dependent on wholesale money market
borrowings
3
Choice of Monetary Regime
•
Alternative approaches to monetary stability - theory
•
Currency regimes in the modern world - practice
•
Currencies and convertibility – banknotes and their
backing
•
How a typical currency board operates – balance
sheet and operations
•
History & features of Hong Kong Currency Board
•
How has Hong Kong system worked in practice?
•
Summary features of a Currency Board
4
Alternative Approaches to Monetary
Stability - Theory
(2) Control the Price of Money
i.e. FX Rate
(1) Control the Quantity of Money
1
1
/P
/P
D2
D2
D1
Q1
Q2
Q
D1
Q1
Q2
Q
Quantity Control Requires:
Fx Rate Control Requires:
1) Central Bank with ability to
manage high-powered money.
1) Willingness of Authority to
supply or withdraw base money
on demand
2) Reliable forecast of required
money supply for given price
level and level of real GDP.
5
2) Guaranteed convertibility of
base money at fixed price.
Alternative Approaches to Monetary
Arrangements - Practice
Types of Exchange Rate
Mechanism
Fixed Exchange Rate
Permanent or Temporary
Fix
Currency Boards
Permanently Fixed
Rates
6
Managed Exchange Rate Formula or
Discretionary Peg
Central Banks
Temporarily Fixed, but
Adjustable
Floating Exchange Rate Clean or
Dirty Float
IMF Classification of Exchange Rate
Arrangements
Framework
Countries
1. No Separate Legal Tender (Permanently Fixed Rates)
2. Currency Board Arrangements* (Permanently Fixed Rates)
41
7
3. Other Conventional Fixed Peg Arrangements (inc managed
rates) (Formula)
41
4
Pegged Exchange Rates With Horizontal Bands (Formula)
5. Crawling Pegs (Formula or Discretionary)
5
6
6. Pegged Exchange Rates Within Crawling Bands (Formula or
Discretionary)
1
7. Managed Floating With No Pre-Announced Path for
Foreign Exchange Rate (Dirty Float)
8. Independently Floating (Clean Float)
* Bosnia & Herzogovina, Brunei, Bulgaria, Djibouti, Estonia, Hong Kong, Lithuania.
Source: IMF, International Financial Statistics, December 31st, 2004
7
51
35
Practical Problems of Floating Exchange
Rate Regimes for a Small, Open Economy
• High degree of volatility – exchange rate, money
and credit growth rates, prices, inflation etc.
• How to decide appropriate money growth rate?
• How to judge credit growth at banks and nonbank financial institutions?
• Exposure to carry trades – what is the
equilibrium exchange rate? How much deviation
to accept?
8
Iceland’s choice
• Undervalued exchange rate
• Capital controls
• Loans from IMF, Nordics, UK etc
• Pledge to keep monetary conditions tight
• But what will be the exit strategy?
9
Do Banks Lend After Bubbles Burst?
Japan in the 1990s –> lending contraction
Non-Japan Asia after 1998 –> slow loan growth
JAPANESE COMMERCIAL LAND
PRICES & BANK LENDING
LEVELS
550
550
30
31/10/08
500
500
BANK LENDING & MONEY GROWTH
IN ASIA (AV OF HK,MY,TH,TW)
%YOY
30
31/10/08
25
25
450
450
20
400
400
350
ASIAN
FINANCIAL
CRISIS
20
15
15
10
10
5
5
200
0
0
150
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
LAND PRICES,6 BIG CITIES
JAPANESE BANK LENDING(R.H.SCALE)
Source: DATASTREAM
-5
300
350
250
300
200
250
150
EQUITY
MARKET PEAK
29 Dec 1989
100
50
10
-5
8687888990919293949596979899000102030405060708
ASIAN COMPOSITE LENDING
ASIAN BROAD MONEY GROWTH
Source: DATASTREAM
Inflation profile after bubbles burst:
Japan in the 1990s => Deflation
NJAsia after 1998 => Low-flation
8
JAPAN:
CONSUMER PRICES AFTER
THE BUBBLE BURST IN 1990
31/10/08
8
7
7
6
6
5
4
3
YIELD ON
10-YR JGB'S
Consumption
Tax Imposed
5
18
ASIA:
INFLATION AFTER
THE BUBBLE BURST IN 1997-98
31/10/08
18
16
16
14
14
12
12
10
10
8
8
6
6
4
4
4
3
2
2
1
1
0
0
-1
-1
2
2
-2
858687888990919293949596979899000102030405060708
JAPANESE CPI %YOY,3MMA
YIELD ON 10-YR JGB'S
Source: DATASTREAM
0
0
-2
11
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
ASIA INFLATION COMPOSITE
Source: DATASTREAM
Vulnerability to the Carry-Trade
5.5-7.5%
interest
0.2% interest
0.2% interest
AUD
Principal
Gradual
appreciation
JPY
Principal
Gradual
depreciation
2004-2007
1.The Great Moderation
2. Ample liquidity
3. Currency volatility low
12
8% interest
(Jan 2008)
July-Nov
2008
AUD
falls
from
AUD
JPY104
Principal
to
Abrupt
JPY65
depreciation
(-37.5%)
JPY
Principal
Abrupt
appreciation
July-Nov 2008
1. End of the business upswing
2. Liquidity tightens sharply
3. Currencies revert to PPP
Vulnerability to the Carry-Trade:
Portfolio inflows into Australia and Hungary
350
300
250
200
150
100
50
0
AUSTRALIA: FX RESERVES
& CUMULATIVE CAPITAL INFLOW
DEBT SECURITIES
(US$ BN)
30/10/08
350
35
300
30
250
30/10/08
35
30
25
25
20
20
15
15
10
10
5
5
0
0
200
150
100
50
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
CUMULATIVE P/F INFLOWS
FOREIGNEXCHANGE RESERVES
HIGH 324 15/8/07,LOW 4 15/2/00,LAST 317 15/11/07
HIGH 67 31/5/07,LOW 11 31/5/00,LAST 28 29/8/08
Source: DATASTREAM
13
HUNGARY: FX RESERVES
& CUMULATIVE CAPITAL INFLOW
DEBT SECURITIES
(US$ BN)
-5
-5
2000 2001 2002 2003 2004 2005 2006 2007 2008
CUMULATIVE P/F INFLOWS
FOREIGNEXCHANGE RESERVES
HIGH 31 15/11/07,LOW 0 15/5/00,LAST 31 15/11/07
HIGH 27 30/6/08,LOW 9 29/11/02,LAST 25
29/8/08
Source:
DATASTREAM
Consequences of the Carry-Trade:
Overvaluation of AUD & HUF
1.00
USD/AUD & PPP
31/10/08
1.00
0.95
0.95
0.90
0.90
0.85
0.85
0.80
0.80
0.75
0.75
0.70
0.70
0.65
0.65
0.60
0.60
0.55
0.55
0.50
0.50
0.45
0.45
2000 2001 2002 2003 2004 2005 2006 2007 2008
US $ TO AUSTRALIAN $ - EXCHANGE RATE
PURCHASING POWER PARITY
HIGH 0.97 18/7/08,LOW 0.49 30/3/01,LAST 0.65 24/10/08
HIGH 0.65 3/1/00,LOW 0.62 1/1/04,LAST 0.63 1/7/08
Source: DATASTREAM
14
140
HUNGARIAN FORINT/SWISS FRANC31/10/08
140
& PPP
160
160
180
180
200
200
220
220
240
240
260
260
2000 2001 2002 2003 2004 2005 2006 2007 2008
HUF/CHF
Source: DATASTREAM
PPP BASED ON CPI
PPP BASED ON PPI
HIGH 184.43 24/10/08,LOW 141.04 18/7/08,LAST 184.43 24/10/08
HIGH 240.35 15/5/08,LOW 158.10 14/1/00,LAST 239.07 15/8/08
HIGH 198.7 15/2/08,LOW 158.1 14/1/00,LAST 191.7 15/7/08
Consequences of the Carry Trade:
AUD & NZD External Vulnerability
0
-10
-20
-30
-40
AUSTRALIA & NEW ZEALAND:
BANKS' NET FOREIGN ASSETS
(%GDP)
22/10/08
0
-10
AUSTRALIA & NEW ZEALAND:
CURRENT ACCOUNT DEFICITS
(%GDP)
23/10/08
0
-1
-1
-2
-2
-3
-3
-4
-4
-5
-5
-6
-6
-7
-7
-20
-30
-40
-50
-50
-60
-60
95 96 97 98 99 00 01 02 03 04 05 06 07 08
AUSTRALIA
NEW ZEALAND
HIGH -7.5 2/1/95,LOW -29.0 1/1/08,LAST -28.1 1/4/08
HIGH -19 1/1/96,LOW -59 1/4/08,LAST -59 1/4/08
Source: DATASTREAM
15
0
95 96 97 98 99 00 01 02 03 04 05 06 07 08
AUSTRALIA
NEW ZEALAND
HIGH -1.0 15/11/01,LOW -5.2 15/11/07,LAST -5.2 15/11/07
HIGH -1 15/11/01,LOW -6 15/2/06,LAST -6 15/11/07
Source: DATASTREAM
Consequences of the Carry-Trade:
Overvaluation of TRL & ISK
0.40
TURKEY: LIRA/USD
VERSUS PPP (CPI BASED)
30/10/08
0.40
0.60
0.60
0.80
0.80
1.00
50
30/10/08
50
60
60
70
70
80
80
90
90
100
100
110
110
120
1.00
1.20
1.20
1.40
1.40
1.60
1.60
1.80
1.80
2.00
2.00
120
2.20
2.20
130
2000 2001 2002 2003 2004 2005 2006 2007 2008
TURKISH LIRA/US DOLLAR
PURCHASING POWER PARITY
HIGH 1.74 21/3/03,LOW 0.55 14/1/00,LAST 1.70 24/10/08
HIGH 2.07 15/5/08,LOW 0.55 14/1/00,LAST 2.06 15/9/08
16
ICELAND KRONA/USD
VERSUS PPP(CPI BASED)
Source: DATASTREAM
130
2000 2001 2002 2003 2004 2005 2006 2007 2008
ICELANDIC KRONA TO US $ EXCHANGE RATE
PURCHASING POWER PARITY
HIGH 119.59 24/10/08,LOW 58.62 11/3/05,LAST 119.59 24/10/08
HIGH 90.00 15/9/08,LOW 71.59 15/3/00,LAST 90.00 15/9/08
Source: DATASTREAM
Asian Resilience:
Lessons from the Asian Financial Crisis
ASIA: BANKS' NET
FOREIGN ASSETS
(%GDP)
20
22/10/08
20
10
25
ASIA: CURRENT ACCOUNT
BALANCES AS %GDP
23/10/08
25
20
20
15
15
10
10
5
5
0
0
-5
-5
-10
-10
-15
-15
10
0
0
-10
-10
-20
-20
-30
-30
-40
-40
95 96 97 98 99 00 01 02 03 04 05 06 07 08
KOREA
THAILAND
CHINA
MALAYSIA
HIGH 2.92 1/1/98,LOW -9.65 1/1/08,LAST -9.65 1/1/08
HIGH 7.77 1/1/03,LOW 2.05 1/7/99,LAST 5.28 1/4/08
HIGH 5 2/4/01,LOW -9 1/7/05,LAST -3 1/4/08
HIGH 9.85 2/4/07,LOW -37.88 1/10/97,LAST 4.54 1/4/08
Source: DATASTREAM
17
95 96 97 98 99 00 01 02 03 04 05 06 07 08
KOREA
THAILAND
CHINA,VISIBLE TRADE BAL
CHINA, CURRENT A/C
MALAYSIA
HIGH 12.63 1/4/98,LOW -5.65 1/1/97,LAST -0.06 1/4/08
HIGH 22.99 2/7/07,LOW -5.32 1/1/04,LAST 20.03 1/7/08
HIGH 5 15/5/08,LOW
1 15/5/02,LAST 5 15/5/08
HIGH 13.82 1/1/98,LOW -12.94 1/4/05,LAST -1.46 1/4/08
Source: DATASTREAM
Eastern Europe’s Vulnerability
EASTERN EUROPE:
BANKS' NET FOREIGN ASSETS
(%GDP)
EASTERN EUROPE:
CURRENT ACCOUNT BALANCES
AS %GDP
27/10/08
30
23/10/08
20
30
15
20
10
10
10
10
5
5
0
0
0
0
20
15
-5
20
-10
-10
-20
-20
-30
-30
-40
-40
-5
-10
-10
-15
-15
-20
-20
-50
95 96 97 98 99 00 01 02 03 04 05 06 07 08
95 96 97 98 99 00 01 02 03 04 05 06 07 08
RUSSIA
UKRAINE
RUSSIA
UKRAINE
HUNGARY
POLAND
HUNGARY
POLAND Source: DATASTREAM
Source: DATASTREAM
ROMANIA
ROMANIA
HIGH 21.58 3/1/00,LOW -3.71 1/4/98,LAST 6.02 1/4/08
HIGH 15.6 1/1/01,LOW -22.8 2/4/07,LAST -20.1 1/4/08
HIGH -1.36 15/8/01,LOW -10.75 14/5/04,LAST -6.67 15/5/08
HIGH -2.56 1/10/01,LOW -14.04 3/4/06,LAST -12.43 1/4/08
HIGH -1.70 3/1/00,LOW -41.30 1/10/07,LAST -27.86 1/4/08
HIGH 3.40 1/1/01,LOW -21.23 1/1/08,LAST -18.45 1/4/08
HIGH 20.77 1/4/99,LOW -9.95 1/1/08,LAST -6.60 1/4/08
HIGH 3.5 2/1/95,LOW -16.8 1/1/08,LAST -14.3 1/4/08
-25
18
-25
-50
Vulnerability of Baltic States
-- Iceland a special case
BALTICS & ICELAND:
BANKS' NET FOREIGN ASSETS
(%GDP)
BALTICS & ICELAND:
CURRENT ACCOUNT BALANCES
AS %GDP
27/10/08
10
27/10/08
2.50
10
2.00
5
1.50
1.50
0
0
1.00
1.00
-5
-5
0.50
0.50
-10
-10
-15
-15
-20
-20
2.50
2.00
0
5
0
-0.50
-0.50
-1.00
-1.00
-1.50
-1.50
-25
-25
-2.00
-2.00
-30
-30
-2.50
95 96 97 98 99 00 01 02 03 04 05 06 07 08
ICELAND
LATVIA
ESTONIA
Source: DATASTREAM
LITHUANIA
HIGH 2 2/10/06,LOW -1 2/4/01,LAST 2 2/4/07
HIGH 0.2 2/1/95,LOW -1.3 1/4/08,LAST -1.3 1/4/08
HIGH 0.1 2/7/01,LOW -0.9 1/1/08,LAST -0.9 1/4/08
HIGH 0.06 3/4/00,LOW -2.15 1/1/08,LAST -2.07 1/4/08
-35
-2.50
19
-35
95 96 97 98 99 00 01 02 03 04 05 06 07 08
ICELAND
LATVIA
ESTONIA
Source: DATASTREAM
LITHUANIA
HIGH 4.62 15/8/02,LOW -34.56 15/5/08,LAST -34.56 15/5/08
HIGH 4.2 15/8/95,LOW -23.9 15/2/07,LAST -10.0 15/5/08
HIGH -0.06 15/8/01,LOW -18.81 15/2/08,LAST -16.76 15/5/08
HIGH -1.98 15/2/00,LOW -27.23 15/11/06,LAST -15.56 15/5/08
Currency Boards: Basic Features
20
•
Typically maintain 100% foreign exchange
reserves for monetary base...
•
...in order to maintain convertibility of the local
currency on demand at the fixed exchange rate.
•
Typically do not (or cannot) conduct domestic
open market operations.
•
Domestic monetary conditions, inflation etc
determined by the balance of payments respond
to conditions in the anchor currency’s economy.
•
SUMMARY: Currency Boards pursue passive, rulebased, non-discretionary operations.
HK$/US$ Exchange Rate, 1970-2001
Restoration of the External Anchor from
Oct 1983
4.5
5.0
5.0
5.5
5.5
6.0
6.0
6.5
6.5
7.0
7.0
7.5
7.5
8.0
8.0
8.5
8.5
70
21
4.5
HK$/US$
72
74
76
78
80
82
84
86
88
90
92
94
96
98
'00
What are the implications of having a
currency board?
• Implications for interest rates?
• Implications for money supply growth?
• Implications for economic growth rate
and business cycle?
• Implications for inflation?
• Implications/requirements for ability to
deal with shocks? Conditions for success?
22
HK & US Interest Rates Converged
under the Currency Board System
18
18
%
16
16
14
14
3-mth HK$ Interbank Rate
12
12
10
10
8
8
6
6
4
4
July
88
Sept
98
2
2
3-mth Euro$ Rate
0
0
83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01
8
8
%
6
6
3-mth HK$ Interbank Rate
4
4
minus 3-mth Euro$ Rate
2
2
0
0
-2
-2
July 88
Sept 98
-4
-4
-6
-6
83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01
23
HK & US Interest Rates Converged
under the Currency Board System
US AND HONG KONG 3-MONTH INTEREST RATES
14
14
12
12
HONG KONG
3-M INTERBANK
OFFERED RATE
10
10
8
8
6
6
4
2
4
UNITED STATES
3-M INTERBANK
OFFERED RATE
2
0
24
83 84 85 86 87 88 89 90 91 92 93 94 95
HONG KONG INTERBANK OFFERED RATE - 3 MONTH (EP)
US 3 MONTH INTERBANK RATE (LONDON) (MTH.AVG.)
Source: DATASTREAM
0
96
97
98
99
00
01
02
03
04
05
06
Hong Kong's Monetary Growth Stabilized
Under The Currency Board System
45
45
% YoY
40
35
40
HK Money Supply M3 or
HK$M3
(Linked Series)
30
30
25
25
20
20
15
15
10
10
5
5
0
0
66
25
35
October 1983 Linked Rate
System for HK$
68
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98 '00
Hong Kong's Monetary Growth Stabilized
Under The Currency Board System –
Until the Asian Crisis
HONG KONG: HK$M3
35
35
%YOY
30
30
25
25
HK$M3 %YOY
20
20
15
15
10
10
5
5
0
0
-5
-5
82
84
86
88
Source: DATASTREAM20/2/06
26
90
92
94
96
98
00
02
04
06
Under Fixed Exchange Rates, HK & US
Traded Goods Prices Converged –
Until the Asian Crisis
TRADED GOODS PRICES IN HK & US, %YOY
15
15
HK EXPORT UNIT PRICES
10
10
US PPI, FINISHED GOODS
5
5
0
0
-5
-5
-10
-10
83 84 85 86 87
HK EXPORT UNIT PRICES
US PPI, FINISHED GOODS
27
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
Source: DATASTREAM
03
Under Fixed Exchange Rates, Consumer Prices
(esp. Non-Traded Goods) do not Necessarily
Converge
HONG KONG AND US INFLATION RATES (CPI %YOY)
2/2/04
15
Oct 1983,
HK$ Fixed
15
HK CPI 'A'
10
10
5
5
US CPI
0
0
-5
-5
80 81 82 83 84
HK CPI 'A' %YOY
US CPI INFLATION
Source: DATASTREAM
28
85
86
87
88
89 90
91
92
93
94 95
96
97
98
99
00
01 02
03
Hong Kong:
Consumer and Export Price Levels
300
300
Index (84Q4=100)
HK Consumer Price Index
Or NON-TRADED GOODS PRICES
250
250
200
200
HK Export Unit Value
Or TRADED GOODS PRICES
150
100
100
50
50
84
29
150
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99 '00 '01
Hong Kong’s Productivity Growth Exceeded
US Productivity Growth
15
15
% YoY
10
10
HK Productivity Growth
5
5
0
0
US Productivity Growth
-5
-5
-10
-10
83
30
84 85
86 87 88
89 90 91
92 93
94 95 96
97 98
99 '00 '01
Hong Kong: Dramatic Structural Changes Under
the Currency Board (due to Opening of China)
100%
100%
Government
Construction Industries
Transport Services
90%
90%
80%
80%
Wholesale, Retail and Import/Export Trades,
Restaurants and Hotels
70%
70%
60%
60%
50%
50%
40%
40%
30%
30%
20%
20%
Manufacturing Industries
10%
10%
0%
0%
80
82
84
86
88
Employment by Major Sectors (%)
31
90
92
94
96
98
'00
Hong Kong’s Fiscal Prudence: Budget
Surpluses the Norm
HONG KONG GOVERNMENT BUDGET BALANCE AS % GDP
20/2/06
8
8
6
6
HK GOVT BUDGET BALANCE
4
4
2
2
AVERAGE
0
0
-2
-2
-4
-4
-6
-6
80
82
84
86
HK GOVT BUDGET BAL %GDP
AVERAGE
Source: DATASTREAM
32
88
90
92
94
96
98
00
02
04
06
Hong Kong’s Experience Under the Currency
Board from October 1983 - Summary
33
•
Exchange rate vis-a-vis US$ substantially stabilized.
•
Amplitude of fluctuation of monetary growth reduced.
•
Interest rates now track US$ rates, though there are
some exceptions.
•
Traded goods price inflation converged to US inflation.
However, non-traded goods price inflation initially
exceeded US inflation (to 1998), then fell below US
inflation (due to Asian crisis).
•
Flexibility of the HK economy permitted large
structural changes.
•
Fiscal Prudence: Budget Surpluses Averaged 1% of
GDP.
•
Financial Supervision: Authorities Ensured that Banks
Maintained High Capital Adequacy Ratios (to withstand
interest rate and other shocks better).
Refinements of the Hong Kong Currency
Board
34
•
1983-88: Credit creation was still occurring that
was inconsistent with the balance of payments
•
SOLUTION (1988): Replace private clearing
house with HSBC account at HKMA
•
1997-98: Interest rates driven sharply higher due
to speculation against HK$
•
SOLUTION (1998): Create reserve accounts at
HKMA for all banks; CU & discount window as
shock absorber.
•
HKMA permits discounting of EFBNs (Currency
Board bills & bonds) on overnight basis at penal
rates (effectively lender of last resort facility
acting as shock absorber).
•
Convertibility Undertaking sets upper and lower
bands for conversion of HKD to USD and viceversa.
HKD/USD Rate and Convertibility
Undertakings, 1998-2008
7.70
25/11/08
7.70
HK$/US$ SPOT RATE, 1997 ONWARDS
7.80
7.80
7.90
7.90
1997
1998
1999
2000
HK$/US$ SPOT RATE
UPPER BAND OF CU AT 7.75
LOWER BAND OF CU
35
2001
2002
2003
2004
2005
2006
2007
2008
Source: DATASTREAM
Hong Kong After the Asian Currency Crisis
(1998 onwards)
Currency Board Balance Sheet
Assets
Liabilities
Foreign Currency Securities
Certificates of Indebtedness
(1)Clearing Balances of Banks
(2)Currency Board Bills & Bonds
Net Worth
Commercial Bank Balance Sheets
Assets
Certificates of Indebtedness
Vault Cash
Clearing Balances of Banks
Loans and Investments
Currency Board Bills & Bonds
Foreign Assets
36
Liabilities
Bank Notes Issued
Deposits
Foreign Liabilities
Net Worth
Currency Boards: Conditions for Success
• 100% Foreign Exchange backing of Monetary
Base
• Convertibility between Monetary Base and all
other components of the Money Supply
• Flexibility in Product & Factor Markets e.g. in
all prices, wages, & economic structure
• Free flow of goods, services and capital
across international borders
• Strong financial supervision to ensure
institutional soundness, capital adequacy etc.
• Fiscal prudence, esp. not too much borrowing
from abroad
37
Currency Boards and Currency Boardlike Systems (as of June 2002)
Country
Population
GDP (US$)
Start
Exchange rate/note
Bermuda [UK]
63,000
$2 billion
1915
Bermuda $1 = US$1 / Loose capital
controls
Bosnia
3.8 million
$6.2 billion
1997
1.95583 convertible marks = 1 euro /
Currency board-like
Brunei
336,000
$5.6 billion
1952
Brunei $1 = Singapore $1 / Currency
board-like
Bulgaria
7.8 million
$35 billion
1997
1.95583 leva = 1 euro / Currency boardlike
Cayman Islands
[UK]
35,000
$930 million
1972
Cayman $1 = US$1.20
Djibouti
450,000
$550 million
1949
177.72 Djibouti francs = US$1 / Currency
board-like
Estonia
1.4 million
$7.9 billion
1992
8 kroons = 0.51129 euro / Currency boardlike
Falkland Islands
[UK]
2,800
unavailable
1899
Falklands £1 = UK£1
Faroe Islands
[Denmark]
45,000
$700 million
1940
1 Faroese krone = 1 Danish krone
Gibraltar [UK]
29,000
$500 million
1927
Gibraltar £1 = UK£1
Hong Kong [China]
7.1 million
$158 billion
1983
Hong Kong $7.80 = US$1 / More orthodox
since 1998
Lithuania
3.6 million
$17 billion
1994
3.4528 litai = 1 euro / Currency
board-like
Source of population and GDP data: CIA World Factbook 2001.
38
Conclusion – 3 options
• Floating Exchange Rate
-- problems for small, open economy
-- carry-trade distortions
-- inflation target not achieved
• Fixed Exchange Rate/Currency Board
-- Robust form of fixed rate
-- WITH proper financial supervision
-- WITH shock absorbers
• Euro-isation
39