CURRENCY BOARD ARRANGEMENTS AS A SUPER‐FIXED ALTERNATIVE IN THE CHOICE OF EXCHANGE RATE REGIME¹

Abstract

Currency board arrangements (CBAs) are currently widely proposed as a super-fixed exchange rate solution to exchange rate volatility. This paper researches the nature, operation, benefits and disadvantages of CBAs. Benefits comprise improved policy credibility, lower inflation and interest rate levels, increased economic growth, increased foreign capital flows, and sharply reduced currency speculation. These are compared with the shortcomings of CBAs, such as the absence of a lender of last resort, real exchange rate misalignments and their consequences for the economy. The paper identifies the type of country that would be the most likely candidate to benefit from a CBA. Copyright (c) 2007 The Author. Journal compilation (c) 2007 Economic Society of South Africa.