MEASURES TO STRENGTHENING THE CURRENCY BOARD IN BOSNIA AND HERZEGOVINA

Abstract

The paper analyzes the posibilties for modifying existing currency board in Bosnia and Herzegovina. Generally, the currency board, as a monetary policy and exchange rate regime, has significant advantages in that it enables macroeconomic stabilization, primarily stabilization of inflationary expectations by establishing macroeconomic discipline; convertibility of domestic currency through its pegging to reserve currency, that normally covers monetary liabilities of the central bank; and increase in credibility and confidence in the domestic currency. As main disadvantages of the currency board, especially an orthodox currency board, stand out its procyclicality, due to inability of conducting autonomous monetary policy and nonexistence of the lender of last resort function, when the risks of financial crises increase. In the paper, based on available theoretical developments and solutions in practice, possible alternatives and measures for strengthening the existing monetary policy framework in Bosnia and Herzegovina – the orthodox currency board – have been analyzed, with the aim of increasing flexibility and resilience of the country’s monetary system and protection of its financial sector in conditions of a large economic crisis. Primarily, the possibility of introducing a lender of last resort function in the Central Bank of Bosnia and Herzegovina for providing liquidity backup for the banking sector has been considered, in which way the model of orthodox currency board would become closer to the model of quasi currency board, implemented in practice in many other countries.