Currency boards: A monetary and exchange rate policy solution for transition countries?

In view of the recent financial crises in many emerging markets many economists have become proponents of a bipolar view: Flexible exchange rates or very hard pegs maintained by policies such as dollarization or currency boards. This study provides a comprehensive overview of the theoretical design of currency board systems as well as the practical experience with the system in two transition countries, Estonia and Lithuania. Chapter 1 outlines the institutional framework of currency boards in theory and practice in both countries. As an extension to other studies in this field, the author investigates in chapter 2 adjustment mechanisms in the short- and medium-term which arise as a result of economic shocks. Chapter 3 presents new empirical findings on the liquidity management of the Estonian and Lithuanian central banks and analyses monetary policy instruments in depth. Chapter 4 discusses the main drawbacks of currency boards, which are mainly a result of the institutional setting of the system. The author concludes that the Estonian currency board has been particularly successful and can therefore serve as a model for other transition countries, especially the successor states of the former Soviet Union.