A Simple test of currency board automatic mechanism in Bulgaria, Estonia and Lithuania
ENThe presence of automatic mechanism within the framework of the currency board is often cited as a major counterpoint to the “discretion and subjectivity” of a classical central bank. Since there is no precise definition of the automatic mechanism in the literature, we define it as: “the presence of a positive cointegration relationship between the balance of payments and the reserve money (or money supply) and absence of discretionary variables in the model.” When discretionary variables are present in the model in one form or another, we may speak of a “mechanism for adjustment through discretion - conscious or unconscious.” Within the framework of the second generation of currency boards, we reduce the channel of discretion to the presence of atypical balance sheet items and employment of a number of monetary policy instruments. In Lithuania and Bulgaria deviations from the orthodox form of CB are significant: the governments of these countries hold their accounts at the central banks and impact reserve money, i. e. conduct a form of monetary discretion (in most cases unconscious). Econometric models confirm that the automatic mechanism operates in Estonia and Lithuania only in its weak test form (between the balance of payments and reserve money). In Bulgaria the operation of the automatic mechanism is more or less reduced to “adjustment through discretion.” Government deposit plays a key role in adjustment to balance of payment shocks in a case of Bulgarian currency board. The next logical step of the analysis is to test whether movement in government money has an indirect effect (through reserve money) on interest rates, i. e. for presence or absence of a liquidity effect. Empirical tests confirm the assumption that such an indirect effect is in place both in Bulgaria and Lithuania. Keywords: currency boards, monetary policy, transmission mechanism, liquidity effect and transitions economies.
