Abstract
In the years 2004-2014 the Lithuania’s exchange rate policy was based on a rigid currency board system. After a period of uncontested success in the fight against inflation in the first decade of the transition and economic growth, entering the ERM II in 2004 and efforts to adopt the euro were treated as an optimal exit strategy from the currency board system. However, the consequences of this exchange rate system in the following years (until 2014) prevented Lithuania from meeting the economic convergence criteria. The starting point for the research is based on the theoretical analysis of literature studying benefits and risks associated with the use of the currency board system by the monetary authorities. The empirical analysis refers to the case of Lithuania and covers the years 2004-2014. The purpose of this analysis is to look at the effects of the use of the currency board system from the perspective of the convergence criteria of monetary nature and the extent of their implementation in the absence of opportunities for autonomous monetary policy.
Highlights
One of the modern varieties of the rigid exchange rate systems is the currency board system
While the use of the currency board system largely contributed to the stabilisation of the economy and the effective suppression of inflation in the first decade, after the accession to the European Union in 2004 it began to show the negative consequences of this exchange rate system
This will enable answering the question whether the risks associated with the use of a currency board system are due to the specific conditions of a given economy or whether they stem from the essence of a rigid exchange rate system
Summary
One of the modern varieties of the rigid exchange rate systems is the currency board system It was used during the systemic transformation in the Baltic States – Lithuania and Estonia. In the Baltic States – in contrast to other economies in Central and Eastern Europe – after reaching the macroeconomic stabilisation no changes in the exchange rate system into a more flexible system were introduced. Both in Estonia and Lithuania rapid adoption of the euro was treated as an exit strategy from the currency board system A interesting case is the Lithuanian economy, which in 2006 ran less than 0.1 percentage point to meet the inflation criterion, and because of the limitations associated with the currency board system this criterion was possible only in 2014
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