Evidence on Currency Boards

Historical results from currency boards have been generally positive. Economies with proper currency boards have consistently had lower inflation and higher GDP growth than other economies in the last half century, the period for which such statistics are widespread and fairly reliable. In contrast, devaluations have been common among central banking systems that have tried to maintain pegged exchange rates or no peg at all. Cases include the collapses of the Bretton Woods system of pegged exchange rates in the early 1970s, the Exchange Rate Mechanism of the European Monetary System in 1992, the East Asian financial crisis of 1997, and numerous devaluations by individual countries since.

“Currency boards are simple, transparent, and credible — the three things central banks are not.” - Steve Hanke

Empirical Results Across Countries

1. Inflation Collapses Immediately

Currency boards have a perfect track record of crushing inflation when introduced after periods of monetary instability.

• Bulgaria (1997): Inflation fell from hyperinflationary levels to single digits within months.
• Estonia (1992): Inflation dropped from over 1,000% to below 50% in a year.
• Lithuania (1994): Similar rapid disinflation following the introduction of the board.

The mechanism is simple: with monetary discretion removed, expectations stabilize instantly.

2. Fiscal Discipline Improves

Because governments cannot finance deficits through money creation, fiscal behavior changes.

• Budget deficits shrink as governments must rely on real financing.
• Public debt trajectories stabilize or reverse.
• Investor confidence increases, lowering borrowing costs.

urrency boards impose hard budget constraints that politicians cannot evade.

3. Economic Growth Recovers

Once inflation collapses and credibility is restored, growth rebounds.

• Bulgaria: After the 1997 board, GDP growth averaged over 5% for several years.
• Estonia and Lithuania: Rapid transitions to stable, high‑growth market economies.

Currency boards do not create growth directly — they create the stability that allows it.

4. Exchange Rate Stability Attracts Investment

Foreign direct investment rises sharply after stabilization.

• Predictable exchange rates reduce risk premiums.
• Investors treat currency‑board economies as safer than discretionary central‑bank regimes.

This is one of the most consistent empirical findings across all currency‑board cases.

Why Currency Boards Outperform Central Banks

My argument is straightforward: rules beat discretion.

Read up on my work in 🇧🇬 Bulgaria, 🇪🇪 Estonia, and 🇱🇹 Lithuania, three countries where currency boards turned chaos into stability.