How to reduce inflation: an independent central bank or a currency board? The experience of the Baltic countries

ENCountries in transition often face high levels of inflation. This paper discusses two ways to reduce inflation: the creation of an independent central bank; and the introduction of a currency board. It is shown that both options have advantages and disadvantages. This framework is used for a normative analysis of the policy choices of the Baltic states. It is argued that, while Estonia's currency board based on the D-mark is very much in line with the criteria for an optimal monetary regime, Lithuania's initial choice of a US dollar-based currency board is not. The peg to the SDR — which very much looks like a currency board — as (eventually) adopted by Latvia is an intermediate case. Some policy recommendations and the problem of exit strategies towards the Euro zone are discussed.