The History and Sustainability of the CBA in Estonia

Urmas Sepp, Raoul Lättemäe and Martti Randveer
Additional contact information
Urmas Sepp: Bank of Estonia
Martti Randveer: Bank of Estonia

Macroeconomics from University Library of Munich, Germany

Abstract: Estonia has had a currency board arrangement (CBA) for more than 10 years. Due to the successful performance of the Estonian economy under a CBA the current position of the Bank of Estonia is to maintain its exchange rate regime until full participation in the EMU, inter alia, during Estonia’s participation in ERM 2. Therefore, it is necessary to analyse the reasons for maintaining the CBA in the past and whether it is a viable option in the future. The main aim of this paper is therefore to give an overview of the history of the Estonian CBA and examine the different aspects of its sustainability. In section 2 the article describes the basic features of the CBA in general and the Estonian CBA in particular and discusses the rationale for the choice of a CBA in Estonia. The third section of the article describes the main developments of the Estonian economy during the last 10 years. Both financial sector and real sector developments are briefly discussed. In the fourth section, we assess the sustainability of the Estonian CBA. We specifically analyze whether the preconditions for the successful performance of the CBA are in place. First, we examine the fiscal policy stance after the introduction of the currency board with special emphasis upon the period strongly influenced by external shocks (1997–1999). Secondly, we discuss the flexibility of the real sector of the economy. For this purpose the flexibility of wage setting, movements in the real exchange rate and changes in foreign trade are discussed. Thirdly, we analyse the resilience of the banking sector by looking at its performance during the external shocks experienced during the Asian and Russian crises. The article concludes that the Estonian economy fulfils the main economic preconditions for the sustainability of the CBA – sufficient fiscal discipline, flexibility of the real sector and resilience of the financial sector. Therefore, the CBA could be considered a suitable exchange rate arrangement before Estonia’s entry to the third stage of the EMU.

Keywords: Estonia; Currency Board (search for similar items in EconPapers)
JEL-codes: E42 E58 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2002-12-10
New Economics Papers: this item is included in nep-his, nep-ifn and nep-tra
Note: Type of Document - Aplication/PDF; prepared on none; to print on none; pages: 36; figures: included. Published in Alternative Monetary Regimes in Entry to EMU
References: Add references at CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://econwpa.ub.uni-muenchen.de/econ-wp/mac/papers/0212/0212002.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpma:0212002

Access Statistics for this paper

More papers in Macroeconomics from University Library of Munich, Germany
Bibliographic data for series maintained by EconWPA ().