How does a Currency Board Reflect on the Economic Development in the Long Run?: A Comparative Approach of Central Banking System and Currency Board Arrangement
Independent thesis Advanced level (degree of Master (One Year)), 10 credits / 15 HE creditsStudent thesis
Currency Board Arrangement (CBA) is one of the exchange rate regimes where domestic currency is 100% backed up by a foreign (anchor) currency. When a country adopts a CBA, it acts as the central bank but only with limited authoritative power. Unlike a central bank, CBA does not lend to the government and does not act as a lender of last resort to the commercial banks. Moreover, CBA was created to solve the problem of lack of transparency of the central bank and government’s relationship. The central bank controls the monetary policy and plays an important role in the economic development of countries. One of the main problems associated with the central banks is adverse selection. To avoid adverse selection, to achieve economic stability, and to support the development, some countries choose conservative policies like a CBA. Hence our goal of this research is to understand if CBA results in a better performance compared to the independent central bank system. Therefore the following research question is developed:
“Do the countries using a CBA benefit from it in terms of long term macroeconomic performance, financial stability and business environment, compared to other transition economies functioning under an independent central bank?”
Before proceeding with the research question, a research gap in the literature was identified. The gap exists as there are not that many recent studies done on CBA, especially to evaluate the performance of its adopters. To carry out the research study, researchers adopted the positivism as the epistemological consideration and objectivism as the ontological consideration. This research followed a deductive approach with a quantitative strategy and a comparative design. After declaring these methodological choices, a cross-national comparative research was conducted, using six countries with currency board system and with an independent central bank institution. These countries were chosen carefully by comparing the similarities and differences, in terms of history, geography and size. In order to analyse the performances based on twelve macroeconomic indicators, like the Expat Capital’s model.
Once the data was collected from online databases, a self-designed scoring model was used to analyze the data. These results are presented clearly using tables and graphs. After analyzing the result, the 5 hypothesises that were developed based on the theories were tested. A couple of them were accepted while the rest (H1, H4, and H5) were rejected. To conclude the paper the research question was answered and the results suggest that under currency board inflation, debt and deficit are substantially lower than under a central bank system. To maintain the credibility of the results, truth criteria were discussed and the paper concludes suggesting what further research one could do on this research topic.
Place, publisher, year, edition, pages
2014. , 77 p.
Currency Board Arrangement, Central Bank, Financial Indicators, Macroeconomics, Growth and Development
IdentifiersURN: urn:nbn:se:umu:diva-97496OAI: oai:DiVA.org:umu-97496DiVA: diva2:773244
Master's Programme in Finance