Currency Board System Research Articles

(Russian Currency and Finance: A Currency Board Approach to Reform)

Russian Abstract: В этой книге предлагается стратегия избавления от гиперинфляции в России и обеспечение России стабильной, вызывающей доверие и полностью конвертируемой национальной валютой. В ней предлагается реформа денежной системы России с помощью валютного фонда. Валютный фонд представляет собой финансовый институт, который выпускает банкноты и монеты, полностью обеспеченные иностранной валютой, которая полностью конвертируется в резервную валюту по требованию по фиксированному обменному курсу. Наиболее вероятной резервной валютой является доллар США. Выпускаемый валютным фондом в соответствии с нашими предложениями рубль будет таким же стабильным и вызывающим доверие, как доллар. Следовательно, валютный фонд покончит с гиперинфляцией в России. Он также повернет вспять широко распространенную в настоящее время неофициальную долларизацию российской экономики, при которой доллары предпочитают рублям, а многие товары нелегко приобрести за рубли. В отличие от использования долларовых банкнот, использование при системе валютного фонда рублевых банкнот и монет обеспечит доход от их выпуска (в виде пошлины за право чеканки монет) Российскому правительству. English Abstract: Russian Currency and Finance (1993) presents an alternative approach to monetary reform - the currency board system, such as exists in Hong Kong and Bulgaria. Under this system, the rouble would be linked to a stable foreign currency at a fixed exchange rate, providing a stable, fully convertible domestic currency for Russia. As this text illustrates, the currency board system is in fact well tested and has been used successfully before in Russia. This text also explains in detail how to establish and operate a currency board.

An Optimal Currency Basket to Minimize Output and Inflation Volatility: Theory and an Application to Hong Kong

AbstractIn this paper we develop a theoretical model of an optimal currency basket for a small open economy. A currency basket for the home economy is defined as a chosen weighted average of a subset of foreign currencies, and an optimal currency basket is taken to be one that minimizes a given weighted average of the expected output volatility and expected inflation volatility. This theoretical model is then applied to Hong Kong, which has adopted a currency board system for close to 30 years. We estimate an optimal currency basket for Hong Kong and compare its performance with the existing currency board system as well as with currency baskets whose weights are given by export and import trade shares.

Monetary Policy in a Very Open Economy: Some Major Analytical Issues

AbstractThis paper develops three considerations relevant to the possibility of modification of the Hong Kong currency board system for conducting monetary/exchange‐rate policy. The first concerns the system employed by Singapore, an economy similar in several ways to Hong Kong's, whereby the exchange rate is adjusted periodically in activist response to inflation and output developments. The second concerns a generalization, one that calls for adjustments of a weighted average of exchange rate and interest rate instruments, so designed to be effective whether the economy is, or is not, in a liquidity‐trap situation. Finally, the third topic concerns political‐economy aspects of policy, which tend to incline against the use of the activist systems.

The Credibility of Hong Kong's Currency Board System: Looking Through the Prism of MS-VAR Models with Time-Varying Transition Probabilities

The Credibility of Hong Kong's Currency Board System: Looking Through the Prism of MS-VAR Models with Time-Varying Transition Probabilities

A Market Economy Manifesto for Bulgaria

Professor Hanke served as an adviser to Bulgarian President Petar Stoyanov, from 1997 to 2002. In 1997, Bulgaria adopted a Currency Board System, based on Professor Hanke's draft Currency Board Law, which he authored at the request of President Stoyanov. The Currency Board brought an end to Bulgaria's hyperinflation which peaked with a monthly inflation rate of 242%, in February 1997.This paper was original presented as the keynote address, delivered at the Investment Forum 2002, Sofia. In that 2002 keynote speech, Professor Hanke advocated a flat tax for Bulgaria. In 2008, Bulgaria followed that recommendation and adopted a flat tax rate of 10% on personal and corporate income.

Did Argentina Have a Currency Boards in the Mid 1880'S?

My research was part of a larger project to determine how currency board monetary systems have performed. The goal was to find information about the note issue of Argentina's Banco de la Provincia in the mid 1800's in order to determine if Argentina had a currency board system. I also tried to find answers to the questions of why the note issue arrangement was established, how it worked organizationally and why it was replaced.

A Cointegration Analysis of Inflation and Real Estate Returns

Executive Summary. This study investigates the causal relationship between inflation and property returns and the short- and long-term inflation hedging effectiveness of property assets in Hong Kong. The results show that residential property is the only property type providing an effective hedge against actual, expected, and unexpected inflation during the sample period. The autoregressive distributed lag (ARDL) bounds testing results indicate that inflation and property are cointegrated. The causality results support that inflation leads property returns, but not vice versa. The one-way causality between inflation and real estate returns can be better explained by the operation of the Hong Kong currency board system as investment funds flow to the risky real estate assets from banking deposits due to the prospect of lower or even negative interest rates caused by rising inflation in Hong Kong.

Bulgaria: Fifteen Years Later

In this paper I reflect on my experiences in Bulgaria, where I served as President Stoyanov's adviser and played a major role in establishing Bulgaria's currency board. The first of July marked the anniversary of a momentous day in Bulgarian history. On that day, fifteen years ago, Bulgaria installed its currency board system (CBS), finally ending its hyperinflation, which had peaked with a monthly inflation rate of 242%, in February 1997. Armed with a currency board system, Bulgarians overcame the hyperinflation crisis of 1996-97 and finally began to realize stability and economic growth. Now, it’s time to get serious about Bulgaria’s biggest problem: corruption.

MACROECONOMIC VOLATILITY AND COUNTERFACTUAL INFLATION‐TARGETING IN HONG KONG

AbstractThe present paper evaluates macroeconomic adjustment in Hong Kong with an estimated dynamic stochastic general equilibrium (DSGE) model under a fixed exchange rate regime. We find that exports and world inflation shocks are the dominant sources of GDP volatility, with the risk premium taking on importance during the Asian crisis after 1997. A counterfactual simulation, assuming a flexible exchange rate regime with inflation targeting, shows that inflation would have decreased slightly, but interest‐rate volatility would have increased significantly. The welfare gains from switching out of the currency board system appear to be marginal.

Crisis, sustainability of electricity prices and state interventions in Argentina

This article examines the sustainability of wholesale power prices following the 2001 economic crisis in Argentina. We depart from the contractual disputes between the multinational power generating companies and the state of Argentina, arising from price and investment interventions after the economic crisis. Then, we move on to argue that these sector-specific measures were inevitable once some of the key macroeconomic policies such as the currency board system were discarded. Using an error correction method and estimating a counterfactual price series, we demonstrate that in the absence of changes in the price determination method and direct public investment, the level and the volatility of power prices would have been much higher with further knock on effects on the rest of the economy. Copyright 2012 The Author 2011. Published by Oxford University Press on behalf of Associazione ICC. All rights reserved., Oxford University Press.

Finance and long‐term development issues in Southeast Asia

This article analyses Southeast Asian finance over more than a century in light of three issues: the realisation of finance‐leading development; indigenous entrepreneurship; and effective credit provision in rural areas. Colonial currency board systems and non‐interventionist government characterised finance in pre‐World War II Southeast Asia. There was decisive change after independence to a variety of state‐directed, or indeed socialist, attempts to overcome unfavourable pre‐war development legacies. Despite these departures, the article finds that throughout Southeast Asian history, finance rarely, if ever, led development. Today, indigenous entrepreneurship, explored for Malaysia, is generally either bolstered by political patrons or even entirely substituted for by state finance. More positively, market‐aware state initiatives in microfinance may offer a realistic institutional alternative to rural Southeast Asia's historic reliance on informal finance.

Estonian road to euro area – a struggle with inflation within the currency board system

Estonia is an example of a country, which from the beginning of its transformation employed rigid course regime in the form of a currency board. After successful suppression of inflation in the first decade of transformation one could expect, that after joining the European Union and the ERMII system Estonia will soon become a member of the Euro area. However within the next few years of economic development Estonian economy could not fulfill the condition of stability of prices. Only in the time of the World Economic Crisis and Estonian great economic breakdown all criteria of convergence were satisfied. In January 2011 the country will become a member of the monetary union. The aim of this paper is to answer the question, whether processes of inflation in Estonian economy were conditioned by the presence of a rigid currency board system. One will examine here, whether there occurs - postulated in theory - convergence of inflation pace between a country employing a currency board system and a country with a reserve currency.

Hungary in the Financial Crisis: A (Basket) Case Study

This article examines the impact of the recent global financial crisis on Hungary and uses this analysis to draw conclusions about Hungarian economic policy and performance over the last decade. The point at issue is that of why Hungary has shown such vulnerability to global developments and has been forced to obtain external support from the IMF. Conventional explanations for this vulnerability are reviewed and it is noted that such explanations generally centre on what has been seen as an irresponsible fiscal policy stance. While acknowledging the problems inherent in Hungarian fiscal policy during the last decade the article broadens the scope of the debate to include both domestic monetary policy and the nature of Hungary's integration into the international financial system. It is suggested that Hungary occupies an intermediate place with regard to Central and Eastern European economies; situated between the small open economies who have adopted either the euro or a currency board system and the larger economies who have allowed exchange rates to float. This position has led to inconsistencies and vacillations in Hungarian policy stances. The article concludes with some suggestions for an alternative approach to economic policy management for Hungary in the light of current difficulties.

Hong Kong Consumer Prices are Flexible

It is generally believed that prices in Hong Kong are flexible. If this received wisdom is correct then the Currency Board system, which precludes a nominal exchange rate adjustment in response to macroeconomic shocks, may have little macroeconomic cost. However, this belief in price flexibility is based on very little empirical evidence. In this paper, we seek to rectify this in a study the behaviour of sub-indices of the Hong Kong Consumer Price Index. We compare estimated moments in the data against the predictions of models based on flexible prices, capacity constraints, rational inattention, and menu costs. We find evidence in favour of flexible prices.

Estimates of Money Demand Functions for Estonia

This paper examines the money demand function of Estonia in the period 1995–2006. Since Estonia has a currency board system, euro area interest rates are taken into account. We apply different cointegration procedures like the Engle–Granger, the dynamic OLS, and the Johansen procedure to estimate the long-run relationship among money, output, and interest rates. The results show that it is difficult to find a cointegrating relationship for the broad money aggregate M2. For the preferred relationship including euro area money market rate and euro area bond rate a dynamic equation is estimated. This dynamic equation is stable for the whole period. The change of the anchor curreny in the currency board and the accession to the European Union do not alter the relationship.

Fiscal Discipline and Stability Under Currency Board Systems

In economic discussions, currency board systems are frequently described as arrangements with self-binding character to the monetary authorities by their strict rules and establishments by law. Hard pegs and especially currency boards are often seen as remedies to overcome economic and financial turmoils and to return to low inflation. A sustainable debt level closely linked to a disciplined fiscal policy is, however, a premise for medium-term success. We show in a two-period model that the choice of a currency board can increase fiscal discipline compared to a standard peg regime. We derive, furthermore, the conditions for a currency boards to gain a stability advantage compared to a common peg system.

Currency, Credit and Commerce: Early Growth in Southeast Asia

Financing Early Growth: Natural resources versus borrowing in economic development The economic development of British Malaya to 1914: an essay in historiography with some questions for historians The British agency houses in Malaysia: survival in a changing world (with J.H. Drabble) Vent for surplus, the subsistence fund, and the evolution of money. The Provision of Local Money: Southeast Asian monies and the problem of a common measure, with particular reference to the nineteenth century The evolution of money in Singapore since 1819 The working of the Malayan Currency Board and the implications of the currency board system Monetary developments in Malaya and Singapore, 1959-1965 Singapore and Malaysia: the monetary consequences Monetary and exchange rate management in tiny, open underdeveloped economies. Emerging Securities Markets: Securities markets in less-developed countries The new-issue boom in Malaya and Singapore 1961-1964 The development of equity and bond markets in the Pacific region Some reflections on problems affecting securities markets in less-developed countries Bank loans or bonds: some lessons of historical experience (with H.W. Arndt).

Currency Substitution in a Currency Board Context: The Evidence for Hong Kong

Hong Kong is an open economy that uses foreign currencies extensively in domestic payments. This paper focuses on substitution between the domestic and foreign currencies in their role as media of payments in such an economy. It uses quarterly data to estimate currency substitution (CS) for Hong Kong during 1984:I to 2001:III when it had a fixed exchange rate under a currency board system. Two models, a money demand function and a dynamic adjustment model, are estimated using the Johansen cointegration and error-correction technique. The estimates for both these models indicate significant CS in the media of payments. Our estimates also show a significant ratchet effect in CS.

On the Maintenance Costs and Exit Costs of the Peg in Hong Kong

This paper attempts to pioneer a discussion on the exit and maintenance costs of the Currency Board System (CBS) in Hong Kong, and hopes to invite more debate on the issue. It suggests that the exit costs will depend on the timing of an exit, whether there are supplementary packages to mitigate the exit costs, and the choice of an alternative exchange rate system. In particular, it suggests that the monitoring band system favored by Williamson (2000) could help to reduce the exit costs. In addition, the paper points out that there are ways to reduce both the exit and maintenance costs. It then proposes a reform that could benefit the economy regardless of whether the policy maker eventually chooses to continue with or abandon the peg. The study is not only crucial to Hong Kong, but also important to other economies with a CBS as well as to the debate on the choice of exchange rate system.

The Government's Foreign Debt in the Argentine Crisis

AbstractThough the government had adopted a currency board regime since 1991, the Argentine economy suffered a currency crisis in 2002. It is shown that currency crises can arise, even under currency board systems in which the central bank has enough international reserves to respond to arbitrary withdrawals by individuals. The model implies that a government's rapid accumulation of foreign debt should be included as a major predictor of currency crises.