The Benefits and Costs of Currency Boards

Steve Hanke and Kurt Schuler have written another interesting paper on currency boards. I agree with most of what they say. Like them I believe that, currently, a currency board would be a better foundation for the monetary system of Russia and other former Soviet states than a central bank, commodity money, or free banking. This is inevitably a judgment. Economic theory does not permit us to say that a currency board is always an optimal arrangement or when it would not be. No one has described the circumstances under which a currency board, or more generally a fixed exchange rate system, is optimal. Hanke and Schuler suggest that information, credibility, and the size and strength of the banking system are relevant for the choice. These are surely some of the relevant criteria.