Greenwood, John G. (1984a), “The Operation of the New Exchange Rate Mechanism,” Asian Monetary Monitor, Vol. 8 (1984), pp. 2–12.
Greenwood, John G. (1984b), “Why the HK$/US$ Linked Rate System Should Not Be Changed,” Asian Monetary Monitor, Vol. 8 (1984), pp. 12–17.
Hanke, Steven, and Kurt Schuler (1991b), “Keynes’ Russian Currency Board,” in Capital Markets and Development, ed. by Steven Hanke and A. Waiters (San Francisco: Institute for Contemporary Studies Press, 1991). pp. 43–63.
Osband, Kent, and Delano Villaneuva. “Independent Currency Authorities: An Analytic Primer,” Staff Papers, International Monetary Fund. Vol. 40 (March 1993), pp. 202–16.
Adam Bennett, a Senior Economist in the Policy Development and Review Department, holds degrees from Cambridge University and the London School of Economics. He was formerly an Economic Advisor to the U.K. Treasury. The author would like to thank Charles Adams, David Burton, Adaibert KnObl, Susan Schadler, Basil Zavoico. and Tapia Saavalainen for valuable comments.
For an analytical discussion of currency hoards. see Osband and Villaneuva (1993). See also Hanke and Schuler (1991a) for a proposal for currency boards in Eastern Europe. For a description of the last example of a currency board in a neighboring region (Northwest Russia in 1918–19), see Spring–Rice (1919) and Hanke and Schuler (1991b).
Contrary to usual central banking arrangements, reserves held by the Issue Department should not be diversified but held entirely in the currency to which the kroon is pegged, lest exchange rate changes undermine the backing. Reserves held with the Banking Department. on the other hand, can be handled in a more conventional manner and diversified.
Nor did the ruble balance, which featured in the balance sheet of the Banking Department, qualify as reserve backing.
To this end, commercial banks in Estonia are now permitted to hold correspondent accounts with commercial banks in Russia.
In fact, Savings Bank accounts also earned interest, but the interest payable was low (some 3–4 percent a year) compared with that available from the banks during the latter half of 1992 (some 20 percent).
No interest is payable on bankers’ deposits with the Bank of Estonia.
This conversion had to be completed the day following repatriation for domestic accounts and within 30 days for overseas accounts.
Insofar as the correspondent accounts of foreign central banks with the Bank of Estonia remain operational. there is a strong case for setting the target with respect to reserves less currency board cover and less kroon correspondent liabilities. This would avoid misleading variations in “surplus” reserves.
Ruble cash balances collected by the Estonian authorities in this manner are to be returned to Russia in due course, on terms that remain to be agreed.
Further details of the reform, with the associated decrees and other legislation, can be obtained from the report of the Bank of Estonia (1992).
The interest rate on these loans varied, from a maximum of 10 percent to zero, and were never punitive. The maturity was generally of one year. Some of these loans to banks have turned out to be covert loans to government agencies, with the National Grain Board featuring prominently.
By the end of 1992. interest rates for loans were about 70 percent a year, while time deposit rates were 20 percent. After the bank rescue, loan rates declined to some 40 percent. For the first time since the currency reform, loans to the business sector began to rise, and by more than inflation, so that there was a real increase in the stock of credit.
It should be cautioned that the initial price increases partly reflected the liberalization of previously administered prices as well as distortions in the composition of the price indices that resulted from the monetary reform in June.
In the first nine months following the introduction of the currency board. Estonia nonetheless did run a current account surplus.