Currency boards: More than a quick fix?

Once a popular colonial monetary arrangement, currency boards fell into disuse as countries gained political independence. But recently, currency boards have made a remarkable come-back. This essay takes a critical look at their performance. Are currency boards really a panacea for achieving low inflation and high growth? Or do they merely provide a 'quick fix' allowing authorities to neglect fundamental reforms and thus fail to yield lasting benefits? We have three major findings. First, the historical track record of currency boards is sterling, with few instances of speculative attacks and virtually no 'involuntary' exits. Countries that did exit from currency boards did so mainly for political, rather than economic reasons, and such exits were usually uneventful. Second, modern currency boards have often been instituted to gain credibility following a period of high or hyperinflation, and in this regard, have been remarkably successful. Countries with currency boards experienced lower inflation and higher (if more volatile) GDP growth compared to both floating regimes and simple pegs. The inflation difference reflects both a lower growth rate of money supply (a 'discipline effect'), and a faster growth of money demand (a 'credibility effect'). The GDP growth effect is significant, but may simply reflect a rebound from depressed levels. Third, case studies reveal the successful introduction of a currency board to be far from trivial, requiring lengthy legal and institutional changes, as well as a broad economic and social consensus for the implied commitment. Moreover, there are thorny issues, as yet untested, regarding possible exits from a currency board. Thus currency boards do not provide easy solutions. But if introduced in the right circumstances, with some built-in flexibility, they can be an important tool for gaining credibility and achieving macroeconomic stabilization.     

Diversification, Vertical Integration, and the Regional Pattern of Dairy Farm Size

Dairy farm size differs considerably across the United States. We analyze patterns of dairy farm size to determine how differences in vertical integration and diversification relate to farm size. We find that diversification accounts for little size variation. For vertical integration, the partial correlation with dairy herd size is strongly negative. Dairy value-added size measures vary less across regions than herd size, indicating that an important part of herd size variation relates to vertical integration. Nonetheless, dairy farms in the Pacific and South regions remain much larger than farms in the traditional dairy regions, even when accounting for vertical integration.     

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Globalization and Global Economic Governance

This article focuses on the World Trade Organization (WTO) andthe International Monetary Fund (IMF). It starts by noting thatthe case for creating such institutions is not self-evident,since the liberal order of the nineteenth century lacked comparableones. Nevertheless, these institutions perform valuable functions.The article then considers the criticisms of the WTO and theIMF. It finds most, thought not all, unjustified. It concludesthat the WTO could be improved. But, without it, the big powerswould do what they want to an even greater extent than theyalready do. Similarly, while the IMF has made significant mistakes,notably in its promotions of capital-market liberalization,prior to the Asian financial crisis, the charges against itare exaggerated. Finally, the article considers the possibilityof creating new institutions to cover investment, migration,taxation, and the environment.     

Studiengebühren: Ein Weg aus der Bildungskrise?

Das Urteil des Bundesverfassungsgerichts vom Januar 2005 hat die Tür zu Studiengebühren geöffnet. Damit ist eine notwendige Bedingung für eine fundamentale Hochschulreform erfüllt. Welche verteilungs– und bildungspolitischen Folgen hat die derzeitige Hochschulfinanzierung? Wie sind demgegenüber Studiengebühren zu bewerten? Wie ließe sich der Wettbewerb zwischen den Hochschulen verbessern?Prof. Dr. Charles B. Blankart, 62, lehrt Öffentliche Finanzen an der Humboldt-Universität zu Berlin. Er ist Mitglied des Wissenschaftlichen Beirats beim Bundesministerium für Wirtschaft und Arbeit und Mitglied des Wissenschaftlichen Arbeitskreises für Regulierungsfragen bei der Regulierungsbehörde für Telekommunikation und Post (WAR); Gerrit B. Koester, 31, Dipl.-Volkswirt, Dipl.-Pol., ist wissenschaftlicher Mitarbeiter am Institut für öffentliche Finanzen der Humboldt-Universität; und Sascha G. Wolf, 29, Dipl.-Volkswirt, ist Mitarbeiter an demselben Institut sowie bei der Stiftung Marktwirtschaft.     

The Economics of Managing Infectious Wildlife Disease

We use a two-state linear control model to examine the socially optimal management of disease in a valuable wildlife population when diseased animals cannot be harvested selectively. The two control variables are nonselective harvests and supplemental feeding of wildlife, where feeding increases both in situ productivity and disease prevalence. We derive a double singular solution which depends on the initial state and does not require bang-bang controls. The case of bovine tuberculosis among Michigan white-tailed deer is analyzed. In the base model, the disease is optimally maintained at low levels, with intermittent investments (via feeding) in deer productivity.     

Banking fragility and liquidity creation: options as a substitute for deposits

Diamond and Rajan (J Finance 55:2431–2465, 2000; Am Econ Rev Papers Proc 91:422–425, 2001a; Carnegie–Rochester Conf Series Public Policy 54:37–71, 2001b; J Pol Econ 109:287–327, 2001c) have shown in a series of papers that it is precisely the fragility of their capital structure which allows banks to create liquidity. This is because the threat of runs by depositors forces bankers to extract full repayment on otherwise illiquid assets. This result has important implications for financial regulation, such as for capital requirements and deposit insurance. This note shows that put options held by bank owners dominate deposit financing in that they also discipline bankers but do not give rise to inefficient runs. Fragility is thus not necessary for liquidity creation in the Diamond–Rajan framework. This paper has substantially benefitted from the comments and suggestions of an anonymous referee.     

Incentive problems and the pattern of international risk sharing

This paper analyzes the implications of moral hazard and a lack of contract enforcement for risk sharing across countries and regions. We demonstrate that both incentive problems can considerably restrict efficient risk sharing. However, we show that the cross-sectional risk sharing component is much more affected than the intertemporal component. We argue that this may help to explain several stylized facts of international risk sharing, such as the low degree of insurance against permanent shocks.     

Internal devaluation in a monetary union

Reversing significant cumulative losses in competitiveness has emerged as a core challenge in some Eurozone countries. This brief note takes a closer look at one episode of successful internal devaluation, the experience of the new states following German reunification. The case suggests that substantial cumulative competitiveness gains are possible but require significant time. The case further points to relative productivity gains—and hence to structural reforms—as an important aspect of the adjustment process.