By Guillermo E. Perry, Guillermo A. Calvo, W. Max Corden, Stanley Fischer, Alan Walters, John Williamson
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Additional info for Currency boards and external shocks: how much pain, how much gain?
Finally, I want to mention another country among the 18 we studied for the World Bank. Indonesia has had a more or less fixed-but-adjustable regime. What is notable is that after its stabilization in the late 1960s, it institutionalized a very effective presidential decree that mandated that the government cannot run budget deficits. The deficit for this purpose is calculated in the following way: Foreign loans and aid are included as government revenue. That boils down essentially to saying that budget deficits cannot be money-financed.
That is the central issue. I have no simple answers, but I am sure that other members of the panel will have simple solutions to that little problem. Second, if one could avoid shocks, it would be great, because then there would be no problem. S. monetary policies or from changes in the terms of trade. But a country can avoid capital inflow-outflow shocks, to some extent, by making the currency-board system credible. So if there is going to be a currency board, it is necessary to convince the market that the government really means it, that it is going to stick with it and with the associated necessary policiesabove all, tight fiscal policy.
But one must ask whether nominal exchange rate changes have had real effects in those countries or whether nominal devaluations were rapidly washed out by wages and prices rising. If nominal devaluations were rapidly washed out, then there is no point in having a flexible exchange rate. They might as well have completely fixed exchange rate regimes. And, if there is going to be an attempt at a fixed exchange rate, they are much better off with a currency board than with a fixed but potentially adjustable exchange rate regime, because of the speculation problem.
Currency boards and external shocks: how much pain, how much gain? by Guillermo E. Perry, Guillermo A. Calvo, W. Max Corden, Stanley Fischer, Alan Walters, John Williamson