
Holger C. Wolf
et al.
Published online:
22 August 2013
Published in print:
04 April 2008
Online ISBN:
9780262286411
Print ISBN:
9780262232654
Contents
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3.1 Introduction 3.1 Introduction
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3.2 Defining Features of Currency Board Arrangements 3.2 Defining Features of Currency Board Arrangements
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3.3 Credibility Effects 3.3 Credibility Effects
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3.4 Insulation, Integration, and Credibility 3.4 Insulation, Integration, and Credibility
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3.4.1 Fixed versus Floating Exchange Rates 3.4.1 Fixed versus Floating Exchange Rates
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3.4.1.1 Insulation Properties 3.4.1.1 Insulation Properties
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3.4.1.2 Fostering Real Integration 3.4.1.2 Fostering Real Integration
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3.4.1.3 Credible Disinflation 3.4.1.3 Credible Disinflation
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3.4.1.4 A Formal Model of Fixed versus Floating Exchange Rates 3.4.1.4 A Formal Model of Fixed versus Floating Exchange Rates
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Fixed Exchange Rate Regime Fixed Exchange Rate Regime
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Floating Exchange Rate Regime Floating Exchange Rate Regime
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Comparison of Regimes Comparison of Regimes
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The Exit Incentive The Exit Incentive
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3.4.2 Soft versus Hard Pegs 3.4.2 Soft versus Hard Pegs
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3.4.2.1 The Extended Model: Float, Soft Peg, or Hard Peg 3.4.2.1 The Extended Model: Float, Soft Peg, or Hard Peg
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Case I: The Peg Is Maintained Case I: The Peg Is Maintained
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Case II: The Peg Is Abandoned Case II: The Peg Is Abandoned
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Optimal Cost of Exit Optimal Cost of Exit
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3.5 Conclusions 3.5 Conclusions
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Chapter
3 Why Do Countries Choose Currency Boards?
Get access
Pages
25–44
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Published:April 2008
Cite
Holger C., Wolf, and others, 'Why Do Countries Choose Currency Boards?', Currency Boards in Retrospect and Prospect (Cambridge, MA , 2008; online edn, MIT Press Scholarship Online, 22 Aug. 2013), https://doi.org/10.7551/mitpress/9780262232654.003.0003, accessed 4 May 2025.
Abstract
This chapter presents theoretical arguments to explain why countries may or may not opt for a currency board arrangement. The adoption of a currency board arrangement can be seen as being based on two distinct decisions: first, the choice of a fixed over a floating exchange rate regime; and, second, within the spectrum of pegged exchange rate regimes, the selection of a hard peg over a traditional “softer” peg. The chapter reviews the relative merits of fixed versus floating exchange rates before turning to the trade-off between the credibility gain provided by a hard peg and the easier escape in the face of shocks allowed by softer pegs.
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