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

See all articles by Jakob de Haan

Jakob de Haan

University of Groningen - Faculty of Economics and Business; CESifo (Center for Economic Studies and Ifo Institute); De Nederlandsche Bank

Helge Berger

Free University Berlin - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Erik van Fraassen

University of Groningen

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

de Haan, Jakob and Berger, Helge and van Fraassen, Erik, How to Reduce Inflation: An Independent Central Bank or a Currency Board? The Experience of the Baltic Countries (January 2001). Licos Working Paper No. 96/2001, Available at SSRN: https://ssrn.com/abstract=270625

Jakob De Haan (Contact Author)

University of Groningen - Faculty of Economics and Business ( email )

PO Box 800
Groningen, 9700 AV
Netherlands
+31 0 50 3633706 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

De Nederlandsche Bank ( email )

P.O. Box 98
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Helge Berger

Free University Berlin - Department of Economics ( email )

Boltzmannstr. 20
Berlin 14195, 14195
Germany
+49 30 838-54037 (Phone)
+49 30 838-52782 (Fax)

HOME PAGE: http://www.wiwiss.fu-berlin.de/berger/eng_index.htm

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany
+49 89 9224 1266 (Phone)
+49 89 9224 1409 (Fax)

HOME PAGE: http://www.CESifo.de

Erik Van Fraassen

University of Groningen

P.O. Box 800
9700 AV Groningen, Groningen 9700 AV
Netherlands

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