Interest Rate–Economic Growth Nexus Under Currency Board Operations

This paper analyses the effect of the prime interest rate as a monetary policy instrument to stimulate economic growth in Namibia, a small open economy that is constrained by currency board operations. A Vector Autoregressive Model (VAR) was used for the period 1980–2019. The result shows that Namibia’s prime interest rate has no significant effect on economic growth. This finding remains robust and consistent when impulse response function and variance decomposition are employed. The impulse response function indicates a shock on the prime interest rate exhibits an inverse relationship. However, this effect is insignificant in both short and long-run scenarios. The variance decomposition indicates that the prime interest rate has a strongly exogenous impact, implying it has a weak influence on GDP growth. Policy implication indicates that small open economies under currency board operations need to identify different policy responses to circumvent external shocks and addresses their development needs.

ADAPTATION TO EXTERNAL SHOCKS WITHIN THE CURRENCY BOARD SYSTEM ON THE EXAMPLE OF THE BALTIC COUNTRIES AND BOSNIA AND HERZEGOVINA

One of the most important economic policy issues, especially in the post-transition countries, is exchange rate regime (ERR), i.e. the question of optimal exchange rate regime that would stimulate economic growth and propagate macroeconomic stability. For small and EU-oriented countries like Bosnia and Herzegovina (B&H), the EU accession processes and character of countries' economic cycle phase are usually highlighted among many factors. The choice of the appropriate exchange rate system is determinated by the specific characteristics of individual countries, time moment and the characteristics of the external shock occurrence. It is generally accepted that monetary instabilities are treated by fixation and real economic shocks by exchange rate fluctuations. An important criterion for assessing the adequacy of the current exchange rate regime is its response to external shocks, such as the Great Recession in 2008. While flexible exchange rate regime is used as an automatic stabilizer, fixed exchange rates place certain restrictions. The process of macroeconomic adjustment in the Baltic States is an example of how large macroeconomic imbalances can be reduced without adjusting the nominal exchange rate and how the currency board can be successfully used as a stage in the euro introduction process. The aim of this paper is to give a comparative overview of the currency board introduction in Bosnia and Herzegovina and the Baltic countries, results achieved and reactions to external shocks (Great Recession in 2008) within this exchange rate arrangement, so conclusions that could be valuable in post-COVID 19 recovery can be drawn. Key words: exchange rates, currency board, external shocks

Beyond the diffusion of neoliberalism: Embedded reasoning and policy innovation in the origins of Argentinian currency board

Suffering from high rates of inflation since the 1940’s and having experienced two hyperinflations at the end of the 1980s, Argentina faced in 2019 an increase of prices of more than 50%. But in the 1990s, Argentina achieved at once prices stability and growth. Which were the sources of such an immediate change? Which lessons can be drawn from this experience? As in the 1990s Argentina adopted deep market reforms, stability could be considered an achievement of neoliberal diffusion. Not only international forces were driving forces for the change; the International Monetary Found (IMF) celebrated the success and invited other emerging nations to imitate it. Nevertheless, this perspective underestimates the importance of local context in the history of neoliberal reforms and overestimates the coherence of external forces. Through the analyses of testimonies of Argentine and foreign officials and the study of declassified documents from the IMF, this paper argues that stability was only archived after the adoption of a currency board, which was against the recommendation of most foreign officials. Instead of a simple top-down transposition of ideas, the Argentinian case reveals the importance of technocrats’ agency. Their local innovation not only made the diffusion of neoliberalism possible, it also turned currency board into one of the global anti-inflationist recipes recommended to other countries, despise its heavy consequences.

Specificities of the Monetary Transmission Mechanism within the Bulgarian Currency Board Framework: The first five years

This paper presents an overview of the channels of monetary transmission and their manifestation in Bulgaria – a country in a currency board arrangement – in the first five years after the introduction of the regime. The presence of such a mechanism of transmission requires some form of macroeconomic discretion. The latter is approximated here with dynamics in the single fiscal account present on the balance sheet of the currency board.

Qual a Importância Quantitativa dos Choques na Dotação de Tempo para as Flutuações nos Ciclos Económicos? Lições da Bulgária no Período 1999-2018

A dotação de choques ao tempo é introduzida numa configuração de ciclos de negócios reais, aumentada com um sector governamental detalhado. O modelo é calibrado para dados búlgaros para o período após a introdução do sistema de currency board (1999-2018). A importância quantitativa da presença de choques no tempo total disponível para as famílias é investigada para a magnitude das flutuações cíclicas na Bulgária. Embora as horas trabalhadas se tenham tornado mais voláteis, e os salários um pouco mais suaves, o efeito quantitativo de um tal choque é considerado pequeno, e portanto não muito importante para a propagação das flutuações do ciclo económico.

Central Bank in the Function of Development of National Economy of Bosnia and Herzegovina

The paper addresses and evaluates the currency board policy and assesses whether the currency board, as a form of monetary policy, is in the function of development of Bosnia and Herzegovina's national economy. In this context, a hypothesis that the currency board provides the foundation for growth and development of a transition economy is being put to the test. To test the hypothesis, the paper compares the movement of economic growth indicators (gross domestic product) among the countries of South Eastern Europe with the primary focus on Bosnia and Herzegovina. By comparing the obtained results, as well as by applying the correlation and regression analysis, by means of simple linear regression, it is proven that the currency board does not represent an obstacle to economic growth, but is the basis for establishing the stability of the economy and the basis for sustainable growth and development able to adequately respond to shocks.

Business cycle synchronization and monetary policy in Bosnia and Herzegovina

By adopting the currency board at the end of the last century, and by pegging its exchange rate to the Euro, a quarter of a century ago, Bosnia and Herzegovina surrendered a great part of its monetary policy in the hand of European Central Bank in the hope that the synchronization of the business cycle will make foreign monetary policy completely suitable for Bosnia and Herzegovina. At the same time during these two decades, the Central Bank of Bosnia and Herzegovina has been developing and using reserve requirement and remuneration as discretionary instruments of monetary policy. The research shows that the domestic business cycle and the foreign one are relatively weakly synchronized compared to other countries' degree of synchronization, and by this findings current discretionary monetary policy and its further development and enrichment with new instruments is fully justified. Bosnia and Herzegovina must continue with developing its own discretionary monetary policy without relying on foreign monetary policy.

External and internal macroeconomic shocks in case of small economy with the currency board

External and internal economic shocks can threaten the macroeconomic stability of a small economy. In the currency board regime, there is no role for the Central Bank as a macroeconomic stabilizer in the event of an external or internal shock. In this paper, the research is based on the analysis of eight countries with small economies with currency boards or discretionary monetary policy. The impact and connections between changes in EURIBOR, interest rates, inflation measured by the GDP deflator, money supply and GDP in the period 1997-2015 are analyzed. The paper proves that in countries with a currency board, whose regimes have a harmonized relationship with the European Central Bank and EURIBOR, interest rate shocks are less pronounced. The analysis of the links between EURIBOR, interest rates, money supply, inflation and GDP is not statistically significant in the "experiment" countries. In the control sample of countries with a variable exchange rate, the situation is heterogeneous for individual countries, but statistical significance has been determined in relation to EURIBOR and inflation. We conclude that EURIBOR may be one of the generators of exogenous shocks. In the case of Bosnia and Herzegovina (B&H), there are much more significant internal transmission mechanisms that lead to macroeconomic imbalances. The growth of deposits was preceded by the growth of loans and money supply. This led to a fall in interest rates which the Central Bank of BiH (CBB&H) could not influence due to the currency board. However, the fall in interest rates did not yield the expected results. GDP has shrunk, inflation is falling, while at the same time the high unemployment rate has remained unchanged. The nominal exchange rate of the domestic currency was determined by law, but there was an appreciation of the real exchange rate, which affected the increase in the foreign trade imbalance. The result of the currency board is price stability, nominal exchange rate stability and money supply growth. Negative results are: appreciation of the real exchange rate, faster growth of imports and maintaining a very high unemployment rate. Macroeconomic developments in the BiH economy do not always have the right course that can be expected in mature economies. The achievements and applicability of standard macroeconomic policies are very limited.

Analysis of Minsky moment in the system of currency board in Bosnia and Herzegovina

In the past decade the world faced the consequences of the global economic crisis proclaimed in 2008. The common case for everyone was a financial crisis in which every country bore the burden of the crisis in its own way, and in each country generators of the crisis appeared in different segments. In the 1980s American economist Hyman P. Minsky wrote about this topic, explaining the characteristics of financial crises in rigid financial systems. The aim of this paper is to understand the causes and the consequences of the crisis through creation, growth and bursting of the credit bubble in separate market segments in Bosnia and Herzegovina through the system of currency board. Through the application of vector autoregression model (VAR) the responses to shocks, recorded on the side of demand for loans which were generated in the capital markets and in the construction sector, and the credit shock of demand, which formed, developed and then exploded after the proclamation of the global economic crisis in Bosnia and Herzegovina, were analyzed. Interpretation of the results through the light of hypothesis of Minsky moment is corroborated by an additional fact that a rigid monetary system like currency board did not provide the necessary mechanisms for the maintenance of financial stability. Stability of the financial system of Bosnia and Herzegovina was saved exclusively by the will of parent banks from abroad whose daughters participate in the financial system of Bosnia and Herzegovina.