Currency Boards in the Baltic Countries: What Have We Learned?

Abstract

Straightforward exchange rate arrangements known as currency boards have gained popularity during the past decade. Among transition economies, Estonia first introduced a currency board in 1992, followed by Lithuania in 1994 and Bulgaria in 1997. Currency boards have been useful in achieving macroeconomic stabilisation, and they may have helped the Baltics become the first countries of the former Soviet Union (FSU) to achieve economic growth after the slump in production of the early 1990s. Moreover, Baltic inflation performance has been substantially better than in other FSU countries. Both in Estonia and Lithuania the present exchange rate system has been accompanied by strong real appreciation of the currency, although it is widely accepted that the currencies were very much undervalued when they were initially pegged. However, if rapid real appreciation is accompanied by increases in labour productivity, the present pegs can be maintained. Banking crises in Estonia and Lithuania have not been particularly severe, so apparently rigid currency pegs have not been accompanied by excessive financial sector instability. The tight fiscal policies pursued in both countries, especially Estonia, have been instrumental to the success of these currency board arrangements.

The glory and demise of monetary nationalism in the post‐communist Baltic states

“…In the early 1990s, this arrangement was considered by financial experts as an outdated relic of the distant past. However, for the governments of the restored Baltic states, it was the most attractive option, because they believed that ‘a currency board should work very much like the pre‐World War I gold standard’ (Korhonen : 27). Under this system, the national central bank does not attempt to influence interest rates by establishing a discount rate.…”

Managing Capital Flows in Estonia and Latvia

“…In the financial field, the establishment and functioning of the Baltic currency boards has been discussed (Lopez-Claros and Garibaldi, 1998;Ghosh et al, 2000;Korhonen 2000;De Haan et al, 2001), also in a comparative perspective (Nenovsky et al, 2001). A survey of Baltic securities markets is also available , as are descriptions of monetary transmission mechanisms (Babich, 2001;Lättemäe and Pikkani, 2001;Vetlov, 2001).…”

Wechselkurspolitik in Mittel- und Osteuropa

“…Während also ein fester Wechselkurs offensichtlich ein hilfreiches Instrument in Stabilisierungsprogrammen war, zeigt der Transformationsprozeß Sloweniens und die Entwicklung in den 108 Zu den nominalen Wechselkursentwicklungen der lettischen und litauischen Währungen gegenüber dem US-Dollar im Jahr 1993 vgl. Lainela/Sutela (1994), S. 81, Korhonen (1999a), S. 18, und Korhonen (1999b frühen Jahren in Lettland und Litauen, daß eine erfolgreiche Stabilisierung auch mit flexiblen Wechselkursen möglich ist.…”