Currency boards as a path towards the Eurozone: lessons from the Baltics

In the early 1990s, the three Baltic states adopted de jure (Estonia 1992, Lithuania 1994) or de facto (Latvia) currency boards. After operating under boards for two decades, Estonia (2011), Latvia (2014) and Lithuania (2015) exited to the Eurozone. The paper takes a qualitative look at their experience through the lens of the currency board literature. Viewed over the entire period of operation, the boards delivered on the inflation stabilization objective with little evidence of a growth or trade penalty. The high average performance was however accompanied by high volatility on both the nominal and the real side. While the boards avoided both currency and sovereign debt crises, they contributed to vulnerabilities, notably the 2004–2010 boom-bust cycle. The Baltic experience re-enforces policy lessons from earlier crisis under fixed exchange rates: vigilance and timely response to incipient vulnerabilities associated with short-term capital-inflows and over-heating.