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This paper argues that the paths taken by Estonia and Latvia in their departure from the rouble zone are illustrative of authoritarian neoliberal governance. By challenging the widely assumed simultaneity of ‘democratic’ and ‘market’ revolutions, it critiques institutionalist literature on Baltic exchange-rate regimes and sheds light on the various methods employed to curtail democratic political discourse and participation. The paper delves into the origins of the Baltic neoliberal historical blocs and identifies the social forces that influenced the development of monetary reform initiatives. It then explores the construction of exchange-rate systems through the lens of power struggles within the state bureaucracy, as well as the restructuring of state apparatuses to limit public oversight of monetary policy formulation and implementation. Finally, the paper demonstrates how Baltic currency boards effectively facilitated the establishment of externally-oriented capital accumulation regimes. [ABSTRACT FROM AUTHOR]

Currency boards have had an enduring attraction as a solution to exchange rate and monetary credibility for small open economies, despite few successful examples. In this context, the case of Hong Kong stands out for its longevity; it survived the handover to China, the Asian financial crises in 1997, and the global crises in 2007–8 and 2020. The 1983 currency crisis and the decision to link the exchange rate to the US$ is usually treated as an outcome of local political uncertainty due to the Sino‐British negotiations which set the framework for how Hong Kong would fit with the rest of China after 1997. We present fresh archival evidence from Hong Kong and London to reveal the year‐long debates over Hong Kong's monetary system after a drop in the exchange rate in September 1982 and to demonstrate how most of the protagonists in Hong Kong and London came only reluctantly to accept the idea of re‐pegging the dollar once public expectations had been raised. We also show how the mixture of currency and banking instability affected the terms of the negotiations in 1982 and 1983 and set the framework for the one country, two currencies system that prevails today. [ABSTRACT FROM AUTHOR]

The article studies two main aspects of functioning of the currency board in Bulgaria: its characteristics and its specifics and peculiarities. Concerning the characteristics of the currency board in Bulgaria, the attention is focused on several theoretical matters of the nature of the currency board: mechanism for introduction of the currency board; choosing the foreign currency, to which the local monetary unit is to be fixed; financing the initial currency reserve, in order for the currency board to start functioning; setting the fixed exchange rate to the reserve currency; establishing the amount of coverage of the quantity of cash in circulation by the currency reserves; administration of the currency board; implementation of the function "lender of last resort" in cases of liquidity crisis; supervision of the commercial banks' operation. Each country is characterized by its specifics in terms of management of public finances, condition of the real (non-financial) sector, service sector, monetary and banking system. These specifics are reflected in the monetary boards, introduced in the individual countries. The article provides a detailed analysis of the specifics of the currency board in Bulgaria. The options for an independent monetary policy of the central bank are heavily restricted, and on the other hand, the currency board attained the goal of its policy - ensuring of price stability. As of the present moment, Bulgaria joined the exchange rate mechanism (ERM II) in 2020 and makes every effort to cover the criteria for real convergence. [ABSTRACT FROM AUTHOR]

Among the recent or revisited assumptions in the literature, the "dependent capitalism" hypothesis has met growing interest and relevance in the context of the 2008 economic and financial crisis. The purpose of the present article is first to expand the scope of the dependence analysis to the Balkan countries, both members and non-members of the EU, and second, to demonstrate that dependence also appears in these countries in a differentiated way through another institutional form, not included in the initial theoretical framework of Hall and Soskice, monetary regimes. A monetary regime can be considered as a structuring institutional form, expressing the power relations between national and foreign actors. In the dependent capitalism case, where foreign capital prevails and the trade balance dynamics is determined by the capital account, one could expect that monetary regimes would be implemented in a way to protect the capital and interests of foreign investors in the long term, hence to delegate monetary sovereignty to the investor's country of origin. In the first part of the paper, some theoretical and methodological aspects of the dependent capitalism in post-socialist countries and of the specific monetary regime on which it is based, are discussed. Then, in the second part, the dependence analysis is illustrated by the case studies of monetary regimes in the Balkans during the period from 1990 to 2015. [ABSTRACT FROM AUTHOR]

An introduction is presented in which the author discusses articles in the issue on topics including the role of British and German foreign banks in facilitating trade in the first globalization, the history of the currency board of Hong Kong, China, as well as the end of the Sterling Area.

According to conventional wisdom, industrial country floating exchange rates contain unit roots. SUR tests on panels of monthly Group of Ten (G-1O) log nominal rates reject the null of unit roots for various samples over the current float with significance levels from 0.5% to 15%. On average, in out-of-sample forecasts mean reversion models beat random walks significantly in some forecast periods. For monthly data, the range of expected USD-DHM appreciation rates exceeds 15% per year in the mean reversion model. Mean reversion places strong restrictions on international models: over the sample period, the G-10 had to run monetary policies consistent with stable long-run nominal rates. [ABSTRACT FROM AUTHOR]

Independent monetary policy committees are a simple way of attaining relatively low inflation without completely sacrificing an activist role for monetary policy. If central bankers' types are unknown, then for a wide range of parameters an independent committee achieves higher social welfare than either a zero-inflation rule or discretionary policy conducted by an opportunistic central banker. A key reason for the committee's superior performance is that committee members are relatively likely to opt for low inflation and building a reputation when shocks are small. When large shocks hit the economy, the incentive to react outweighs the reputation-building benefit. [ABSTRACT FROM AUTHOR]

Two experiments were conducted to test the common hypothesis that groups make decisions more slowly than individuals. One of these experiments imitates real-life monetary policy decisions. In both cases, the hypothesis is found wanting: groups are not slower than individuals. In both experiments, we also find that group decisions are on average better than individual decisions. This holds regardless of whether the groups make decisions by unanimity or majority rule. Simple mechanical theories of group decisionmaking--that the group follows its average player, median player, or best player--do not explain the results. Group interactions seem to matter. [ABSTRACT FROM AUTHOR]

This paper looks at internal capital markets in financial conglomerates by comparing the responses of small subsidiary and independent banks to monetary policy. I find that internal capital markets in financial conglomerates relax the credit constraints faced by smaller bank affiliates. Further analysis indicates that those markets lessen the impact of Fed policies on bank lending activity. The paper also examines the role of internal capital markets in influencing the investment allocation process of those conglomerates. My findings suggest that frictions between conglomerate headquarters and external capital markets are at the root of investment inefficiencies generated by internal capital markets. [ABSTRACT FROM AUTHOR]

The history of the Australian Notes Issue Board over the period 1920-1924 is presented. It is shown that the Board was created as a genuinely independent monetary authority, but was soon abolished, as its policies antagonised interests upon which the government depended. The episode illustrates the thesis that the possibility of a genuinely independent monetary authority is problematic. [ABSTRACT FROM AUTHOR]

First, we modify the Barro-Gordon model so that a credibility-stabilization trade-off will remain, even when a performance contract of the type envisaged by Walsh (1995) is imposed on the central bank governor. We do this by modeling a real interest rate bias along with the inflation bias. Then, we discuss how various inflation penalties might actually be imposed on a central bank, and ask whether "inflation targetting" (supported by one or another of penalties) is likely to bring a better resolution to the credibility-stabilization trade-off than the ERM. [ABSTRACT FROM AUTHOR]

The article comments on a paper "Monetary Policy: Theory and Practice," by Milton Friedman based on the theory and practice of monetary policy in the U.S. Friedman included a section on the appropriateness of defensive open market operations. The authors state that Friedman used figures on actual Federal Reserve operations in 1980 to demonstrate his argument that the Federal Reserve engages in excessive securities transactions. The article also discusses volume of open market operations and the relationship to dealer profits.

The article presents comments on the sluggish price adjustments and the effectiveness of monetary policy under the rational expectations model. The papers "'Rational Expectations,' the Optimal Monetary Instrument, and the Optimal Money Supply Rule," by Neil Wallace and Thomas J. Sargent, and "Some International Evidence on Output-Inflation Tradeoffs," by Robert E. Lucas are referenced. The Lucas-Sargent Proposition (LSP) is identified as proof that output behaves according to the supply function offered by Lucas in models where prices are assumed to adjust to clear markets each period, rendering systematic monetary policies ineffective. The assumption of perfect price flexibility is believed to be vital to the LSP's validity.

In analyzing the effects of monetary policy on the demand for tangible consumer assets, such as consumer durables and residential housing, primary attention has been focused on interest rate and credit rationing effects. Recent work (Mishkin (21)) takes a different approach by studying the previously neglected illiquid aspect of consumer durable asset. The following results are derived: the consumer durable is a less desirable portfolio asset if (a) the consumer's debt holdings are high, (b) gross financial asset holdings are low, (c) income variance is high, or (d) expected income is low. These results stem from the illiquidity of the consumer durable asset which causes a rise in the effective opportunity cost of holding the consumer durable as the consumer's probability of encountering financial distress increases. As a result, the balance sheet position of households plays an important role in the demand for durables, and as monetary policy affects the balance sheet it also affects the demand for durables. The results of this "liquidity hypothesis" were tested in a standard stock-adjustment model of consumer durable expenditure on postwar quarterly data; and the empirical results were quite favorable to the hypothesis. Residential housing is also an illiquid consumer tangible asset, differing from consumer durables in that its illiquidity stems from slightly different sources. The liquidity hypothesis should thus apply to the housing asset as well. This paper adapts the liquidity theory to the housing asset and tests the hypothesis on postwar quarterly U.S. data with a model of residential housing demand. The empirical results do indeed support this hypothesis. In previous studies of the demand for residential housing, monetary policy has its major impact either through the availability of credit or the cost of financing the housing purchase. In addition, two novel potent channels of monetary influence on residential housing demand can now be proposed. ... [ABSTRACT FROM AUTHOR]

The article comments on the study "Financial Disintermediation and Policy," written by economist Donald Hester. The author analyzes the effect of substitution on financial markets and economic conditions and discusses the consequences of a shift from deposits into currency on money. The author states that Hester ignores the effect of cyclical changes regarding income or expenditure on currency and demand deposits. He disagrees with Hester and states that by the spring of 1965, monetary policy was overly expansive. The changes in money and in financial assets between 1964 and 1968 are also discussed.

The article presents an introduction to the May 1, 1969 issue of the "Journal of Money, Credit & Banking." The author explains that the role of money in a growing economy is the main concern of monetary growth theory and money is defined as a medium of exchange and store of value. The management of money is the main focus of monetary policy and monetary growth theory regards the role of money within a growing economy. Article topics also include the techniques of analysis, types of money and their role in the economy, and optimality.

In traditional IS-LM analysis monetary policy affects GNP through changes in the money supply (and the resulting impact on "the" rate of interest and investment spending). At the same time, monetary economists have increasingly concerned themselves with the composition of bank portfolios and bank portfolio behavior. The Federal Reserve, also, has paid particular attention to the loan portfolio of commercial banks in its assessment of monetary ease or tightness. The question to which this paper is addressed is, what is the relative importance of bank portfolio composition and the money supply in evaluating the impact of monetary policy? in particular, does the relative importance of these two financial variables vary with how one views the channels through which monetary policy operates? To point up the question even further one may ask, does it matter in evaluating the impact of monetary policy whether an expansion (contraction) in money supply occurs through the banking system's purchase (sale) of securities from (to) the public or whether it increases (decreases) loans? We shall ask also whether it is important to distinguish between different types of loans. Although the ultimate solution to these questions lies in empirical tests, this paper attempts only to clarify the issues with respect to the prevailing theories as to how monetary policy affects real spending. [ABSTRACT FROM AUTHOR]

The article discusses the objective of monetary policy and the effects of a proposed method of implementing monetary policy innovations. It examines the work of Milton Friedman, Lloyd W. Mints and Henry Simons. Their suggestions regard monetary policy as forces acting on the quantity of money, as a government function carried out by a government agency, should follow predictable rules instead of personal whims, should be aimed at domestic economic stability, and should emphasize price stability.

In this paper at first we investigate the viability of creating an optimum currency area (OCA) in the East Asia. The results of a ten-variable VAR model show that forming an OCA for all of the countries in the region is costly and difficult to sustain. But at first five countries called Japan, China, Korea, Malaysia, and the Philippine with symmetric supply shocks can create the OCA. The findings also show that both dollar and yen can be suitable anchor for these countries, but with the exception of Indonesia all other countries are better potential clients of dollar. The final point of this study described the proper arrangements that this region should set up to be successful in this transition. Proper regional exchange rate mechanism and establish supra-national organization and the regional legislation framework seems to be the most important things that this region should be focused on them.

Under a currency board, the central bank relinquishes control over its monetary policy and domestic interest rates converge towards the foreign rates. Nevertheless, a spread between both usually remains. This spread can be persistently positive due to elevated risk in the economy. This paper models that feature by building a DSGE model with a currency board, where the domestic interest rate is endogenously derived as a function of the foreign rate, the external debt position and an exogenous risk premium component. Time variation in the volatility of the risk premium component is then modelled via a Markov-switching component. Estimating the model with Bayesian methods and Estonian data shows that the economy does not react much to shocks to domestic interest rates in quiet times but is much more sensitive during crises, and matches the financial and banking crises, which cannot be captured by the standard DSGE model. [ABSTRACT FROM AUTHOR]

We develop a simple yet realistic framework to analyze the impact of an exogenous shock on a bank's balance-sheet and its optimal response when it is constrained to maintain its risk-based capital ratio above a regulatory threshold. We show that in a stress scenario, capital requirements may force the bank to shrink the size of its assets and we exhibit the bank's optimal strategy as a function of regulatory riskweights, asset market liquidity, and shock size. When financial markets are perfectly competitive, we show that the bank is always able to restore its capital ratio above the required one. However, for banks constrained to sell their loans at a discount and/or with a positive price impact when selling their marketable assets (large banks) we exhibit situations in which the deleveraging process generates a death spiral. We then show how to calibrate our model using annual reports of banks and study in detail the case of the French bank BNP Paribas. Finally, we suggest how our simple framework can be used to design a systemic capital surcharge. [ABSTRACT FROM AUTHOR]

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Copyright of BH Economics Forum / BH Ekonomski Forum is the property of University of Zenica, Faculty of Economics and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

The subject and purpose of the research in this paper is based on the analysis of the influence of the central bank on public debt in the conditions of the currency board in Bosnia and Herzegovina. The structure of the work was set up through a dynamic analysis of the ratio of public debt variables, the supply of money, the state of the budget of the governments of Bosnia and Herzegovina, the current account and the nominal exchange rate. The research covers the period from 2000 to 2016. The research methodology is based on the use of empirical data and the application of the vector autoregresion model (VAR). On the basis of an analysis of the function of impulse and response, it is possible to indicate the reactions of the variable variables with one another. On the other hand, the decomposition of variance through the model proves the mutual variability and interaction of the variables for the observed period of research. The practical implications of the work are reflected in the answer to the extent to which monetary' authorities, in the conditions of the currency board, due to the endogenous supply of money, contribute to the creation of a budget deficit and public debt. [ABSTRACT FROM AUTHOR]

Purpose - The house money effect is proposed to describe that people appear to consider large or unexpected wealth gains to be distinct from the rest of their wealth, and are thus more willing to gamble with such gains than they ordinarily would be. On the other hand, the availability heuristic describes that people tend to have a cognitive and systematic bias due to their reliance on easily available or associational information. The purpose of this paper is to employ these behavioral perspectives in an empirical model regarding the January anomaly to explore investor behavior in Taiwanese stock market with bonus culture and well-known electronics industry. Design/methodology/approach - This study uses the conventional and standard dummy variable regression model, as employed in prior studies, and further includes some control variables for firm, industry and macro-economic level factors. Moreover, 19 industrial indices for Taiwanese stock market over the period January 1990 to December 2014 are included in this study to examine the hypotheses, except for the 1997 Asian financial crisis and the global financial crisis period of 2007-2009 to avoid the potential effect. On the other hand, the authors also use the entire sample period of 1990-2014 for understanding whether the magnitude of January effect is different. Findings - The empirical results indicate that Chinese bonus payments in January induce a strong January effect in the Taiwanese stock market, especially when most listed firms have positive earnings growth in the preceding year, suggesting a house money effect. Moreover, this study further provides some preliminary evidence that the higher January returns due to bonus culture are apparent only in the electronics industry when both Chinese New Year and bonus payments are in January, implying the role of availability heuristic based on the electronics stocks in investor behavior before the impending stock exchange holidays. Some robust tests show qualitative support. Research limitations/implications - The major contribution of this study is to extend the existing research by incorporating cultural and industrial factors with behavioral finance, thus enriching the literature on the causes of seasonality for Asian stock markets. Practical implications - This study also has behavioral implications of investments for investors in the Taiwanese stock market, especially for foreign institutional investors which pay close attention to this market. Originality/value - This study first applies and examines the culture bonus hypothesis with regard to how employees who receive culture bonuses in January can change their attitudes toward risk and induce the January effect from the concept of mental accounting. Moreover, this study further proposes and examines the extended culture bonus hypothesis related to how the January effect due to culture bonus is different for the electronics and non-electronics industries when taking into account the stock market holidays from the concept of availability heuristic. [ABSTRACT FROM AUTHOR]

This article analyzes the potential for institutional design to depoliticize macroeconomic policy-making by examining currency board arrangements. It develops a novel argument to understand the effects of institutional design based on institutional complementarities. This argument highlights that the functioning of a given institution is conditioned by the broader institutional context. The article contrasts this framework with two common approaches – here termed the institutional design and the epiphenomenalism views – and argues that the centrality of institutional complementarities can account for the mixed record of currency boards. The most important complementarities of a currency board are with fiscal, labor market and informal institutions, which are important prerequisites for successful currency boards. By drawing on recent advances in the study of depoliticization, we show how these institutions contribute to governmental, societal and discursive depoliticization. This argument is evaluated by examining three case studies of currency boards – Argentina, Estonia and Lithuania. The article also explores some broader implications of this analysis for understanding the depoliticization of economic policy. [ABSTRACT FROM PUBLISHER]

The aim of this paper is to question the scenario with legal tender law by an analysis of potential competition of alternative currencies. To accomplish such a goal, this study offers an original version of the dynamic macroeconomic model based on the money in the utility function. This model compares the current monetary conditions with the potential situation permitting more currencies circulating alongside. The main assumption about individuals' preferences over stable currencies underlines the whole paper with emphasis on the mathematical model. The outcome of the model reveals lower inflation rate in scenario with competition among currencies in comparison to the present scenario. This result by itself seems to favour the idea of an exclusion of legal tender clause and allowance of free currency competition. The final simulation of the model, using statistical software, brings to this so far "unambiguous" view scepticism due to possible difficulties during the discovery process. [ABSTRACT FROM AUTHOR]

This paper uses unique household survey data to investigate the expected effects of a switch from a fixed exchange rate regime to a floating exchange rate regime in Bulgaria during the global financial crisis. The data show that the public associated such a switch with a contraction of output, higher prices, a decline in exports, and an overall deterioration of economic welfare. These expectations fuelled a strong opposition to removing the fixed exchange rate. Thus, the survey data allow us to investigate why a switch from a fixed exchange rate to a floating exchange rate did not take place. [ABSTRACT FROM AUTHOR]

This paper employs a Markov regime-switching VAR model to describe and analyse the time-varying credibility of Hong Kong's currency board system. The endogenously estimated discrete regime shifts are made dependent on macroeconomic fundamentals. This enables us to determine which changes in macroeconomic variables can trigger switches between the low and high credibility regimes. We carry out extensive testing to search for the most appropriate specification of the Markov regime-switching model. We find strong evidence of regime switching behaviour that portrays the time-varying nature of credibility in the historical data. [ABSTRACT FROM AUTHOR]

How has economic openness affected social spending? Are allocations influenced by the partisan preference of the executive branch? In this paper, I test various hypotheses about the determinants of social spending in contemporary Latin America, using a time-series cross-sectional analysis of 17 countries in the period between 1978 and 2006. Contrary to the expectations of critics, I find that trade openness affects social spending positively and governments are compensating citizens exposed to greater economic uncertainty. In addition, I find that partisanship is an important predictor of social spending. Left-wing executives spend more money on social programmes than their right-wing counterparts. This finding is particularly strong when left-wing executives have greater legislative support. In the final section, I re-examine my quantitative findings in a case study of Uruguay. [ABSTRACT FROM AUTHOR]

The article presents the author's response to the comments on his article "Monetary Policy: Theory and Practice." The author discusses transactions for account of others and the ratio of currency to deposit and the reports of the basic table of the U.S. Federal Reserve Bulletin. The article also discusses the implications of the double counting system temporary transactions. He states that double counting involves a purchase and a sale and both have to be counted in gross transactions. He explains that double counting does not affect the relevant dollar figures of purchases or of sales.

ABSTRACT This study aims to compare the performance of free-floating and currency board regimes for Hong Kong by examining historical data of the two on the output growth and inflation rate. Structural vector autoregression has been applied in the empirical analysis. Without making a strong assumption of unit variance in the residual matrix, this study applies a more natural approach proposed by Cecchetti and Rich to recover the structural parameters. The study has further investigated the recovery of the economy under a demand shock under different exchange rate regimes, in order to provide some evidence to answer why Hong Kong's recovery process after the Asian financial crisis is relatively longer than that in other economies with a managed floating exchange rate regime. New evidence in this study indicates that output recovers much faster in a flexible exchange rate regime than in a fixed exchange rate regime after an aggregate demand shock. Furthermore, this study has applied a more robust method in the counterfactual analysis when comparing the two regimes. New evidence in this study suggests that a free-floating regime may generate much smaller output variance in Hong Kong and deliver higher output and price levels to Hong Kong. [ABSTRACT FROM AUTHOR]

Macroeconomic stabilization of every country depends largely upon the conduct of appropriate economic policy, which comprises both fiscal and monetary policy; therefore, it is of great importance to choose the most adequate and productive ones. Many countries across the board have employed monetary policy in their attempt to ease the consequences of economic crises in the aftermath of global financial meltdown, and in the search for sustainable economic development. This paper was confined to the monetary policy in Bosnia and Herzegovina specifically, and its aim was to address the current Currency Board Regime along with the available monetary policy instruments and to determine whether an opportunity for the improvement of economic growth and consequently economic development lies within it. The importance of Central Bank was stressed out, as it represents the anchor of the monetary system. The paper comprises the analysis of the implemented CBR, its brief history, monetary policy instruments available and its consequences on the economy of B&H and based on that, the recommendations for exit-strategy which, ceteris paribus, represent a key to achieving higher levels of development. The economic indicators suggested that macroeconomic performance under CBA is not advantageous for B&H; therefore, it is thought that abandoning the arrangement either by joining the EMU or by making the Central Bank more independent is necessary. [ABSTRACT FROM AUTHOR]

One of the main collective contributions of the various heterodox schools of monetary thought, such as circuit theory, Post Keynesian theory, modern money theory (MMT) and others, has been to stress the importance of the endogeneity of moneyviabank credit creation. It is necessary to stress the notion of a collective contribution because of the various claims and counter-claims to academic priority made in the literature. The recent exchange between T.I. Palley and E. Tymoigne and L.R. Wray in this journal provides a clear example of this. This response examines the differences between these writers in some detail. [ABSTRACT FROM PUBLISHER]

The local volatility model is a well-known extension of the Black–Scholes constant volatility model, whereby the volatility is dependent on both time and the underlying asset. This model can be calibrated to provide a perfect fit to a wide range of implied volatility surfaces. The model is easy to calibrate and still very popular in foreign exchange option trading. In this paper, we address a question of validation of the local volatility model. Different stochastic models for the underlying asset can be calibrated to provide a good fit to the current market data, which should be recalibrated every trading date. A good fit to the current market data does not imply that the model is appropriate, and historical backtesting should be performed for validation purposes. We study delta hedging errors under the local volatility model using historical data from 2005 to 2011 for the AUD/USD implied volatility. We performed backtests for a range of option maturities and strikes using sticky delta and theoretically correct delta hedging. The results show that delta hedging errors under the standard Black–Scholes model are no worse than those of the local volatility model. Moreover, for the case of in- and at-the-money options, the hedging error for the Black–Scholes model is significantly better. [ABSTRACT FROM AUTHOR]

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. [ABSTRACT FROM AUTHOR]

In the years 2004-2014 the Lithuania's exchange rate policy was based on a rigid currency board system. After a period of uncontested success in the fight against inflation in the first decade of the transition and economic growth, entering the ERM II in 2004 and efforts to adopt the euro were treated as an optimal exit strategy from the currency board system. However, the consequences of this exchange rate system in the following years (until 2014) prevented Lithuania from meeting the economic convergence criteria. The starting point for the research is based on the theoretical analysis of literature studying benefits and risks associated with the use of the currency board system by the monetary authorities. The empirical analysis refers to the case of Lithuania and covers the years 2004-2014. The purpose of this analysis is to look at the effects of the use of the currency board system from the perspective of the convergence criteria of monetary nature and the extent of their implementation in the absence of opportunities for autonomous monetary policy. [ABSTRACT FROM AUTHOR]

The link between real and financial markets is a perennial source of debate and research in macro-finance. The issue resurfaces time and again in different forms: Does the functioning of financial systems have any effect on real activity (commodity market)? What is the possible relation between 'financial' claims and 'real' claims? These questions have gained tremendous currency once again after the subprime crisis and the recent 'great recession' in the Euro zone. The purpose of this paper is to analyze how the 'virtual' economy, captured through the stock market (because stock markets are an integral part of contemporary financial systems), interacts with the 'real' economy producing goods and services. The paper tries to critically understand the short-run interconnections between the expansion of aggregate demand through wealth effect generated by stock market and macroeconomic stability. The paper finds that in a dynamic IS-LM type model with wealth effect, there is a possibility of multiple equilibria and some of them are not stable. Given monetary authority's emphasis on reducing financial market instability, a stabilization program exercised through monetary policy may fail to work when wealth effect is significant. Instead, redistribution of income through tax may turn out to be more effective. [ABSTRACT FROM AUTHOR]