any direct role in financing economic development ; · the exchange rate can not be used as a tool to adjust to economic shocks or poor economic performance. these areas of policy discretion, if used wisely and in moderation, could be of advantage to economic development in bh. there are lots of projects in bh for which a ‘ little bit ’ of cbbh finance may be helpful. but the problem would be in keeping the cbbh credit to a ‘ little bit. ’ the experience of the region is that excess central bank credit has usually been created and the result is inflation. that does not help business, employment or confidence in bh. so in my view, the strict currency board is the best approach for bh. will the currency board be continued in bih? i believe it will for the following reasons : · there is widespread support for it because it has provided one of the few elements of stability the people of bh have had for some time ; · it would be risky to change it. confidence in the km would drop as people waited to see how any alternative monetary policy would work ; · currency boards have worked well in other eastern european countries such as latvia and bulgaria. currency boards are becoming acceptable, even fashionable ; · the long - term goal of bh policy is to take the economy closer to europe. the km is already tied to the euro. it would therefore seem sensible to maintain this link. macro - economic sustainability in bih while i believe strongly that bh should maintain its currency board, there will need to be changes made in other areas if bh is to have macro - economic sustainability over the medium term. the currency board requirement means that the cbbh can not issue km currency in any quantity it chooses or the economy needs. the amount that can be issued is tied to the net position of bosnia and herzegovina ’ s external accounts. this is the currency board arithmetic. what does this currency board arithmetic mean for a central bank and a country? if the net position on a country ’ s external accounts is positive, the central bank ’ s foreign reserves will increase as the foreign inflows are changed into the domestic currency. there is nothing to stop a currency board having more than 100 % backing for its domestic currency liabilities. ( indeed, at present the cbbh has foreign reserves equal to 106 % of our km liabilities. ) so if the overall foreign accounts are in good shape, there will be no pressure on the currency board and medium

peter nicholl : perspectives on monetary policy in bosnia and herzegovina lecture by mr peter nicholl, governor of the central bank of bosnia and herzegovina, to the 1 / 1 student initiative, sarajevo university, sarajevo, may 2001. * * * introduction i am very pleased to have this opportunity to talk to the top students of sarajevo university about monetary policy in bosnia and herzegovina ( bh ). as we have only an hour and a half in all, and i want to leave plenty of time for your questions, i do not have time for a comprehensive discussion of all possible monetary policy issues for bh. so i have decided to talk on the following four inter - related issues : · the currency board option ; · macro - economic sustainability in bh ; · the role of the banking sector in bh ; · institutional design of economic institutions. the currency board option as i am sure you all know, the cbbh operates monetary policy in bh by a currency board arrangement. the three essential features of the currency board, all of which are specified in the cbbh law, are : · the bh currency, the convertible mark ( km ) is tied to the deutschmark ( dem ) at a fixed exchange rate of 1km = 1dem. it is now also tied to the euro at the same rate as the dem ( 1 km = 0. 511 euro ) ; · the km liabilities of the cbbh have to be fully backed with convertible foreign assets ; · the cbbh has to be prepared to convert km for dem at any time for any amount ( i. e. it is a fully convertible currency ) it is interesting to remember back to the sort of payment and banking sector that operated in bh before the cbbh was established in 1997 : · there were four currencies in use in bh and the only one that was used over the whole country was the dem ; · there were three payments bureaus that had a monopoly on domestic non - cash payments but could not settle electronically with each other ; · there were around 70 organisations that called themselves banks but most were very small and none of them operated over the whole country. linking the km to the dem through a currency board was an easy choice for bh because the dm was already extensively used in the country and was the currency people trusted. it has been a successful choice too : · the km has been a stable currency against the dem and the euro since it was introduced ;