Currency boards: more than a quick fix?

Once a popular colonial monetary arrangement, currency boards fell into dis use as countries gained political independence. But recently, currency boar ds have made a remarkable come-back. This essay takes a critical look at th eir performance. Are currency boards really a panacea for achieving low inf lation and high growth? Or do they merely provide a 'quick fix' allowing au thorities to neglect fundamental reforms and thus fail to yield lasting ben efits.' We have three major findings. First, the historical track record of currency boards is sterling, with few instances of speculative attacks and virtually no 'involuntary' exits. Countries that did exit from currency bo ards did so mainly for political, rather than economic reasons, and such ex its were usually uneventful. Second, modern currency boards have often been instituted to gain credibility following a period of high or hyperinflatio n, and in this regard, have been remarkably successful. Countries with curr ency boards experienced lower inflation and higher (if more volatile) GDP g rowth compared to both floating regimes and simple pegs. The inflation diff erence reflects both a lower growth rate of money supply (a 'discipline eff ect'), and a faster growth of money demand (a 'credibility effect'). The GD P growth effect is significant, but may simply reflect a rebound from depre ssed levels. Third, case studies reveal the successful introduction of a cu rrency board to be far from trivial, requiring lengthy legal and institutio nal changes, as well as a broad economic and social consensus for the impli ed commitment. Moreover, there are thorny issues, as yet untested, regardin g possible exists from a currency board. Thus currency boards do not provid e easy solutions. But if introduced in the right circumstances, with some b uilt-in flexibility, they can be an important tool for gaining credibility and achieving macroeconomic stabilization.