Money supply endogeneity under a currency board regime: the case of Bosnia and Herzegovina

Abstract

A currency board is a monetary regime based on an explicit commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate. Currency boards are thought to exhibit properties of money supply endogeneity and monetary self-regulation, eliminating the need for discretionary monetary policy. This paper offers a theoretical and institutional explanation why, under the strict currency board regime in Bosnia and Herzegovina, it is possible to observe credit expansion in the presence of persistent trade deficits. It explains how the lender of last resort function is reestablished through private discount window arrangements between domestic and foreign parent banks, illustrating a de facto privatization and decentralization of monetary policy.

Keywords:

• Bosnia and Herzegovina
• currency board
• Eastern Europe
• endogenous money supply
• Post Keynesian monetary theory