The currency board: an independent issuing institution
Abstract
A successful stabilization program is a harmonic set of structural reforms. Fiscal
equilibrium is not a sufficient condition. It is necessary to reestablish monetary credibility.
Three alternatives to establish a monetary reference based on a foreign currency are
examined. A new currency issued by an independent institution fully backed by an internationally
accepted reserve currency is the alternative proposed. It is argued that the institution
responsible for the issuance of the new currency should be based on the experience of
Currency Boards. Overvaluation of the currency due to residual inertial inflation is a frequent
problem. The gradual introduction of the new convertible currency is proposed as an
attempt to reduce the degree of reference to past inflation in price formation. The risks
associated with a period of parallel circulation of two currencies are examined. Finally,
some of the arguments against such kind of monetary reforms are briefly analyzed.
JEL Classification: E52; E58; E42; E31.
Keywords: Inflation stabilization monetary regime currency board