num_pages: 25
description: The panelists in this report address the challenges countries face when operating under a currency-board system of currency exchange, which replaces the central bank ' s function of controlling the currency and imposes instead a fixed exchange rate on international transactions. The key advantage of this system is that it prohibits resort to liberal monetary policies, which can lead to high inflation. However, it also limits the economy ' s ability to react to external shocks. The focus is on maximizing the advantages and minimizing the costs the currency board operating system triggers. Opinions are given about the characteristics economies should exhibit to determine if they are appropriate candidates for having currency boards. Panelists suggest that governments mitigate the costs of having currency boards by promoting labor market flexibility, credibility of the system to avoid unnecessary capital inflow-outflow problems, and some moderate degree of stabilization. The experiences of Mexico, Argentina, Hong Kong, and the Baltic States are cited as object lessons on how economies rocked by external shocks succeeded or failed to cushion their monetary regimes.
language: English
title: Currency Boards and External Shocks: How Much Pain, How Much Gain?
titlecomplete: Currency Boards and External Shocks: How Much Pain, How Much Gain? (World Bank Latin American and Caribbean Studies)
publisher: World Bank