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Database
CURRENCY
BOARDS
Table 1
Recently established currency boards, main features
Country
Year of
introduction
Anchor
currency
Liabilities to
be backed
Backing rule
in %
At the beginning of the twentieth
Hong Kong
1983
US dollar
Certificates of
25
indebtedness
century most countries in the
1991; system US dollar
Argentina
Monetary base
55
world, including colonies for that
was abanmatter, tried to hold inflation in
doned in 2002
check not by central banks –
Originally
Kroons in
Estonia
1992
100
deutsche mark, circulation
which they did not have – but by
later euro
currency boards. (Keeping to the
Originally
Litas in
Lithuania
1994
100
rules of the gold standard is a speUS dollar,
circulation
cial case of a currency board.)
later euro
Bosnia and
Originally
Aggregate
1997
100
During the course of the century,
Herzegovina
deutsche mark, monetary
however, most currency boards
later euro
liabilities
were abandoned and turned into
Bulgaria
1997
Originally
Aggregate
60
central banks. A wave of dissoludeutsche mark, monetary
later euro
liabilities
tion of currency boards occurred
with the political independence
Source: Compiled from Ho (2002) and recent information from Bank for
International Settlements.
of former European colonies in
Asia and Africa. But some curand Herzegovina and Bulgaria – created currency
rency boards have survived to this day, for example in
boards.
Bermuda, Brunei, the Cayman Islands, Djibouti, the
Falkland Islands, the Faroe Islands or Gibraltar.
The present-day currency boards, however, are not a
The second part of the twentieth century witnessed
“pure” or “orthodox” type. A pure currency board is
a certain revival of currency boards (Table 1). Hong
something like a “rule-based money-changing
Kong started in 1983. Argentina followed eight
machine” (Ho) only, operated by an administration,
years later, but stopped the whole project in 2002.
not by a central bank. Indeed, a central bank does not
From 1992 to 1997 four Central- and South-eastern
even exist. This implies that there is neither active, let
European countries – Estonia, Lithuania, Bosnia
alone discretionary, monetary policy, nor a lender of last resort capaTable 2
bility. By contrast, modern-day
Recently established currency boards, operational features
currency boards are, most often,
operated by central banks, do
Country
Liquidity management
Lender of last resort
some liquidity management and
Hong Kong
No reserve requirements for Hong Kong Monetary
dispose of the possibilities to act as
banks, but overnight and
Authority;
intraday repo
scope: systemic purposes
lender of last resort (Table 2).
Argentina
20% reserve requirement for
banks’ deposits, overnight
repo
Central Bank of Argentina;
scope: extraordinary
circumstances
Estonia
10% reserve requirement for
banks’ deposits, standing
deposit facilities
Bank of Estonia;
no explicit reference to
lender of last resort duties nor
capabilities
Lithuania
8% reserve requirement for
banks’ deposits, overnight
lending
The Bank of Lithuania;
no explicit reference to
lender of last resort duties nor
capabilities
Bosnia and
Herzegovina
10% reserve requirement for
banks’ deposits
–;
extending credit by money
creation forbidden
Bulgaria
8% reserve requirement for
banks’ deposits
Banking department;
scope: systemic risk
Source: Compiled from Ho (2002) and recent information from Bank for
International Settlements.
73
However, the present-day “quasi-currency boards” are currency
boards at least insofar as, first,
the national monetary base is
strictly backed (albeit to different degrees) by reserves of the
anchor currency, and second,
there is a passive (on demand)
change of national into foreign
currency at a prescribed fixed
exchange rate. The national monetary base can only expand by a
surplus in the balance of payments. Thus, such an arrange-
CESifo DICE Report 1/2007
Database
ment is an effective means to keep inflation at low
levels – more exactly: at the level of the anchor currency. Moreover, a currency board (in contrast to circulating foreign currency in the domestic economy,
for example, “dollarisation”) creates some seigniorage revenues.
But there are drawbacks too: International de- and
revaluations of the foreign anchor currency are
passed on to the local currency (one of the reasons
why the Argentina currency board experiment
failed). The same applies to the interest level which
differs only by a risk factor between anchor and local
currency. Finally, due to the lack of monetary-y policy instruments like setting the discount rate or influencing the money supply, wages and prices must be
relatively flexible (especially downwards) in order to
avoid a severe recession.
Currency boards today exist mainly in small (often
former colonial) countries and in countries that have
undergone fundamental systemic reforms. In a small
open economy a currency board does not really limit
the possibilities for monetary management because
in practice they do not exist for such countries. A
reform economy, whether big or small, can credibly
commit itself to monetary stability by following the
rules of a currency board.
R.O.
Reference
Ho, C. (2002), “A Survey of the Institutional and Operational
Aspects of Modern-day Currency Boards”, Bank for International
Settlements Working Paper 110.
CESifo DICE Report 1/2007
74