The Baltic Countries: From Economic Stabilization to EU Accession

An Institutional Framework for Comparing Emerging Market Currency Boards

“…A strong commitment to a peg is only credible if prior signals have been sent as to consistent economic policies and, in particular, to a sustainable course for fiscal policy. Some analysts, including Berengaut and others (1998), thus question the extent to which the choice of the exchange rate regime depends on certain fiscal and financial preconditions being fulfilled. An element of circularity arises from institutional and environmental contributions toward the perceived feasibility of monetary reform.…”

“…Williamson (1995), for instance, identifies a time period in which interest rates in Hong Kong SAR converged to low U.S. levels in spite of high domestic asset prices that would have required a monetary policy tightening. Berengaut and others (1998) examine whether giving up monetary flexibility is detrimental to countries in transition owing to persistent structural rigidities and imbalances. They acknowledge that fiscal and structural policies provide better instruments for addressing such issues, while monetary policy maintains its focus on price stability.…”

“…The issues faced by the currency boards in the Baltic countries are discussed inBerengaut and others (1998).32 The absence of indexation mechanisms, flexible labor markets and low labor costs were also determinant factors in this case.…”