BUKS WESSELS, UNIVERSITY OF THE FREE STATE, SOUTH AFRICA
During the past three decades volatile exchange rates have created major problems for governments, central banks, and financial markets regarding transaction costs, inflationary expectations and macroeconomic stability in general. Currency board arrangements (CBA’s) are currently advocated as a super-fixed exchange rate solution to these policy problems. This paper researches the nature, operation, benefits and disadvantages of CBA’s. Benefits comprise improved policy credibility, lower inflation and interest rate levels, increased economic growth, increased foreign capital flows, exchange rate stability, and sharply reduced currency speculation. These are compared with several shortcomings of CBA’s, such as the absence of a lender of last resort, real exchange rate misalignments and their consequences for the economy. Based upon these aspects, the paper next focuses on the type of country that would be the most likely candidate to benefit from a CBA as an appropriate exchange rate regime.
Keywords: Currency Boards; Fixed Exchange Rates; Super-Fixed Regimes; Exchange Rate Options.