Abstract
Abstract Currency Boards generally are likely to help with introducing credibility and stability if they are organised in a manner to minimise risks. One important aspect is the choice of an appropriate reserve currency. There are two conditions for a currency to be an adequate reserve medium: it should be a hard currency and it should shelter the pegged country from real shocks inside and outside the currency area. A shelter from real shocks can be provided for, if three criteria are met: first, other countries which firms compete with firms from the country that introduces the board should also be pegged to the reserve currency. Second, the structure of production should differ significantly from the reserve country. Third, a high share of foreign trade should take place with the reserve country. Empirical evidence of two countries that recently introduced currency boards, namely Estonia and Lithuania, indicates the relevance of this analysis for the choice of a reserve currency.
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