How to Reduce Inflation: An Independent Central Bank or a Currency Board? The Experience of the Baltic Countries
Licos Working Paper No. 96/2001
Posted: 24 May 2001
Date Written: January 2001
Abstract
Countries in transition often face high levels of inflation. This paper discusses two ways to reduce inflation: the creation of an independent central bank and the introduction of a currency board. It is shown that both options have advantages and disadvantages. This framework is used for a normative analysis of the policy choices of the Baltic states. It is argued that, while Estonia's currency board based on the D-mark is very much in line with the criteria for an optimal monetary regime, Lithuania's initial choice of a US-dollar based currency board is not. The peg to the SDR - which very much looks like a currency board - as (eventually) adopted by Latvia is an intermediate case. Some policy recommendations and the problem of exit strategies towards the Euro zone are discussed.
Keywords: currency board, central bank independence, Baltics
JEL Classification: E58, E61, F31
Suggested Citation: Suggested Citation