The Political Economy of Currency Boards and the Crisis in Central and Eastern Europe

 In recent years there has been renewed debate about currency boards, as a number of countries in East Central Europe and elsewhere have adopted such regimes in recent decades. This debate also relates to important issues in the political economy of exchange rates, notably the influential claim that only corner solutions are likely to be sustainable (see e.g. Fischer 2001) - i.e., only flexible exchange rate regimes or hard pegs, such as currency unions or currency boards, could be expected to withstand economic crises. However, various crises, incl. the recessions of the Baltic States in 2008-09, have cast doubt on the proposition that currency boards are immune to them. Although currency boards and the macroeconomic policies underpinning them largely depend on political factors, there has been very limited political economy research on currency boards (but see Ghosh et al 2000, Wolf et al. 2008). This paper seeks to fill this gap by examining the political economy of currency boards. It analyses both quantitative data and case studies of successful and unsuccessful currency boards and develops an institutionalist framework (Broz and Frieden 2006, Hall and Thelen 2009) to account for cross-national variation in the operation of currency boards and their enforcement and stability. It addresses the trajectories of East Central European countries with currency boards (Estonia, Lithuania, Bulgaria and Bosnia-Herzegovina) during the recent crisis and considers the implications of their experience for other countries in the region, the prospects of EMU enlargement and the politics of adjustment under fixed exchange rates.