ADAPTATION TO EXTERNAL SHOCKS WITHIN THE CURRENCY BOARD SYSTEM ON THE EXAMPLE OF THE BALTIC COUNTRIES AND BOSNIA AND HERZEGOVINA

Marina Jerinić

doi:10.17818/diem/2021/1.17

Abstract

One of the most important economic policy issues, especially in the post-transition countries, is exchange rate regime (ERR), i.e. the question of optimal exchange rate regime that would stimulate economic growth and propagate macroeconomic stability. For small and EU-oriented countries like Bosnia and Herzegovina (B&H), the EU accession processes and character of countries' economic cycle phase are usually highlighted among many factors. The choice of the appropriate exchange rate system is determinated by the specific characteristics of individual countries, time moment and the characteristics of the external shock occurrence. It is generally accepted that monetary instabilities are treated by fixation and real economic shocks by exchange rate fluctuations. An important criterion for assessing the adequacy of the current exchange rate regime is its response to external shocks, such as the Great Recession in 2008. While flexible exchange rate regime is used as an automatic stabilizer, fixed exchange rates place certain restrictions. The process of macroeconomic adjustment in the Baltic States is an example of how large macroeconomic imbalances can be reduced without adjusting the nominal exchange rate and how the currency board can be successfully used as a stage in the euro introduction process. The aim of this paper is to give a comparative overview of the currency board introduction in Bosnia and Herzegovina and the Baltic countries, results achieved and reactions to external shocks (Great Recession in 2008) within this exchange rate arrangement, so conclusions that could be valuable in post-COVID 19 recovery can be drawn. Key words: exchange rates, currency board, external shocks

Highlights

Monetary policy has important mission of money supply regulation by targeting inflation rate or achieving full employment in each economy
The process of macroeconomic adjustment in the Baltic States is an example of how large macroeconomic imbalances can be reduced without adjusting the nominal exchange rate and how the currency board can be successfully used as a stage in the euro introduction process
Such adjustment stems from the high degree of flexibility of the economy and should rely on a decisive and strong policy response to restructure the economy by restoring competitiveness and laying the foundations for sustainable economic growth

Summary

INTRODUCTION

Monetary policy has important mission of money supply regulation by targeting inflation rate or achieving full employment in each economy. A fixed – or pegged – exchange rate is entirely determined by the government of the currency in question They both have advantages and disadvantages, especially for countries in transition that often face high inflation levels (De Haan et al, 2001). Economic history shows that CBA implementation was usually imposed by others or it was independent choice for countries that before had high inflation rates, socio-politicaleconomic instabilities or because of low credibility of the local central banks The aim of this paperwork is to compare and to analyse reactions to external shocks in countries that cannot manipulate their exchange rate to improve their competitiveness, namely to analyse measures applied in Baltic countries and in B&H in fight against Great Recession, and to discuss reactions and possible similarities in measures used in finding the way out from crisis caused by the COVID19 pandemic. It is followed by analysing macroeconomic adjustment after Great Recession, measures implemented to deal wıth the COVID 19 consequences in observed countries and conclusion at the end

THE IDEA OF THE CURRENCY BOARD

MEASURES TO DEAL WITH THE COVID 19 CONSEQUENCES

Findings

CONCLUSION