Currency boards for eastern Europe?

Feasibility of a currency board type of monetary arrangement in transitional economies of Eastern Europe is a function of the size of the country and the nature of the financial sector in a country. For very small countries where financial services can be provided by subsidiaries of foreign financial institutions the currency board is likely to be an optimal monetary arrangement. However, if the need exists for an efficient domestically based financial sector - as is likely in medium and large countries - the currency board type of arrangement appears unfeasible. Major reason is the need to restructure the domestic financial system in these countries. Such restructuring is costly and unlikely to be paid out of fiscal revenues. Hence, the need for Central Bank with its ability to create "net domestic assets" as the restructuring agent. However, once the transition is concluded and East European countries accession to EU becomes a serious possibility, a currency board arrangement appears to be a best intermediate monetary step before joining the Euro area.

Keywords: currency board, transitional economies, monetary arrangement, accession to European Union