Currency Board Arrangement and Transition: The Issues, Controversies and the Experience of Bosnia

Abstract

In the last decade there has been considerable discussion on what exchange rate policies shall be pursued by developing countries as well as countries in transition as mean of successful transformation and effective mechanism to spur private sector growth and promote stability. the central to this, rather broad and growing debate, has been the role of fixed exchange rates, and the currency board arrangements (cba) in particular.this paper provides a comprehensive analysis of the attractions and disadvantages of such arrangements principally drawing on the experience of bosnia and herzegovina (bih). it assesses merits and costs related to this arrangement, primarily looking at the rigidities and constraints the regime imposes on macroeconomic policies, and the subsequent impact on growth and development. finally, the paper elaborates if and under which conditions, the weaknesses associated with the regime are off set with its repeatedly assigned advantages of i.e. macroeconomic stability, low inflation, increased confidence and established credibility as well as reduced “costs” to business transactions and investments. the paper concludes that bosnian currency board was viable temporary solution and that serious consideration shall be given to exiting the regime. the paper is thought to provide useful insights to policy makers and contribute to the overall monetary and exchange rate debate.currency board arrangement, policy misalignments, transition