Currency Boards - How a Currency Board Works

Essay , 2009 , 9 Pages , Grade: 2,3

Economics - Monetary theory and policy

„Stability might not be everything, but without stability everything is nothing.“ This quote of the former federal minister for economics and finance in Germany leads directly to the reason for the installation of a currency board.
Stability of the monetary system means the achievement of three objectives: a fixed exchange rate system to alleviate the calculations for international trade, free capital movement to ensure the convertibility of currencies, and a monetary policy that can address independently domestic concerns like inflation or unemployment. Unfortunately, it is impossible to achieve all three objectives at the same time. This goal conflict is often called "triangle of impossibility" or "impossible trinity" in the international economics literature. If a country's decision is to fix the exchange rate to a selected currency, a currency board would be one of the possible instruments. In this essay, first
there will be taken a short look at how a currency board works and what the political meanings and consequences are. Afterwards, a short analysis of the currency board-like system that has been installed in Argentina from 1991 to 2002 leads to the drawbacks and opportunities of currency boards.

Inhaltsverzeichnis (Table of Contents)

• Introduction
• How a Currency Board Works
• Analysis of The Currency Board-Like System in Argentina
• Conclusion and Outlook
• List of Literature
• List of Figures
  • Fig. 1: The impossible trinity of monetary policy.
  • Fig. 2: Exchange Rate and Inflation in Argentina.........
  • Fig. 3: Debts of Argentina in % of GDP, small numbers: in bn US $...
• List of Tables
  • Tab. 1: A typical currency board versus a typical central bank..
  • Tab. 2: Argentina before and after setting up a currency board...
  • Tab. 3: Modern currency board systems....
• Abbreviations

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

This essay aims to provide a comprehensive overview of currency boards, examining their mechanics, advantages, and disadvantages. It delves into the specific case of Argentina's currency board-like system, analyzing its implementation, successes, and eventual failures. The essay also explores the broader implications of currency boards for monetary policy and economic stability.

• The functioning of currency boards and their role in stabilizing monetary systems.
• The "impossible trinity" of monetary policy and the trade-offs involved in achieving fixed exchange rates, free capital movement, and independent monetary policy.
• The Argentinian experience with a currency board-like system, including its impact on inflation, economic growth, and the country's overall financial stability.
• The potential benefits and drawbacks of currency boards, considering factors such as economic flexibility, political constraints, and the potential for crises.
• The future prospects of currency boards in the context of global economic trends and the evolving landscape of monetary policy.

Zusammenfassung der Kapitel (Chapter Summaries)

The introduction sets the stage by discussing the importance of monetary stability and the "impossible trinity" of monetary policy. It introduces the concept of currency boards as a potential solution for achieving exchange rate stability and highlights the key objectives of the essay.

Chapter 2 delves into the mechanics of currency boards, explaining how they operate and the key features that distinguish them from traditional central banks. It discusses the role of the anchor currency, the 100% backing of the domestic currency, and the limitations on discretionary monetary policy.

Chapter 3 provides a detailed analysis of Argentina's currency board-like system, examining its implementation, its impact on the economy, and the factors that ultimately led to its collapse. It explores the successes and failures of the system, highlighting the challenges of maintaining a fixed exchange rate in the face of economic shocks and political pressures.

Schlüsselwörter (Keywords)

The keywords and focus themes of the text encompass currency boards, monetary policy, exchange rate stability, economic stability, Argentina, the impossible trinity, inflation, economic growth, and the challenges of maintaining a fixed exchange rate in the face of economic shocks and political pressures.

• College: Free University of Berlin
• Course: International Monetary Relations
• Grade: 2,3
• Author: Raffaele Nostitz (Author)
• Publication Year: 2009
• Pages: 9
• Catalog Number: V126833
• ISBN (eBook): 9783640335282
• ISBN (Book): 9783640334964
• Language: English
• Tags: Argentinienkrise, Currency Board, Zentralbank, IWF, Dollar Peg, Integrationstheorie, Hyperinflation, Argentinien