Table of Contents

Monetary Integration and Dollarization

Monetary Integration and Dollarization

No Panacea

Edited by Matías Vernengo

This book deals with the economic consequences of monetary integration, which has long been dominated by the Optimal Currency Area (OCA) paradigm. In this model, money is perceived as having developed from a private sector cost minimization process to facilitate transactions. Not surprisingly, the book argues, the main advantage of monetary integration in the OCA context is the reduction of transaction costs, yet the validity of OCA to analyze processes of monetary integration seems to be limited at best.

Chapter 2: European Experiences of Currency Boards: Estonia, Lithuania, Bulgaria and Bosnia and Herzegovina

Jean-François Ponsot

Subjects: economics and finance, financial economics and regulation, international economics


Jean-François Ponsot INTRODUCTION A currency board solution, therefore, is equivalent to the blood letting prescribed by 17th century doctors to cure a fever. Enough blood loss can, of course, always reduce the fever but often at a terrible cost to the body of the patient. Similarly, a currency board may douse the flames of a currency crisis but the result can be a moribund economy. (Davidson, 2000, p. 16) The expression ‘currency board’ has two different meanings, describing as it does both a particular monetary arrangement, the currency board arrangement (CBA) – characteristic of the British colonial era – and the organization within this system entrusted with the monopoly of issuing local currency – in many cases the former central bank if already in existence. The activity of the currency board is governed by three strict rules: 1. an exchange rate rigidly pegged to a foreign reference currency; 2. the obligation for the currency issued to be freely and integrally convertible into this foreign ‘reserve currency’; 3. an obligation for the currency board to keep in its balance sheet assets a volume of foreign reserve currency equal to at least 100 per cent of the currency issued, i.e. the monetary base is made up of money in circulation plus bank reserves. In the light of the financial crises striking the developing economies over the past ten years, a general consensus has emerged, denouncing the unsuitable character of the intermediate exchange rate systems and calling for the adoption of one or other of...

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