The recent fascination appears to have been inspired by their success in dealing with hyperinflation in several countries such as Argentina and Bulgaria. Argentina did in fact abandon its currency board sometimes back in 2002 after it experienced one of it's worst recession. Lithuania and Estonia also turned to currency boards to obtain credibility for their newly established countries. The renewed appetite for fixed exchange rate regime justifies a closer look at ideal conditions for their establishment, with particular interest to the Argentina's experience.
A currency board combines three aspects; one, the exchange rate is fixed to an anchor currency. Secondly, there must be automatic convertibility- it should be always possible to exchange local currency at the fixed rate and thirdly, there should be a long term dedication to this system. The fixed exchange regime that that currency board imports is usually appropriate for small economies with fragile central banks. The fixed exchange rate regime will only be effective if there are sufficient foreign exchange reserves to cover the local current issued.
A fixed exchange rate system will be of no use if a country is unable to maintain a sustainable exchange rate to the anchor currency. This might cause serious balance of payment problems if the local currency is overvalued. ...Show more