TAILIEUCHUNG - CURRENCY BOARD OR CENTRAL BANK? Lessons from the Irish Pound's Link with Sterling, 1928-79

We assess some stylised facts on long-term interest rates, using weekly and daily data. Then we explore how these events were interpreted in capital markets by reviewing weekly notes and newsletters of four major investment banks for 2002, and we provide a chronology of major fiscal policy events throughout the year. The fiscal policy events are classified either as country specific actions and decisions related to the implementation of the surveillance procedures (“type 1” fiscal events), or as announcements of policy targets and discussions on the European institutional framework (“type 2” fiscal events). The relation of some of these selected fiscal events with long-term government yields, the implied. | CURRENCY BOARD OR CENTRAL BANK Lessons from the Irish Pound s Link with Sterling 1928-79 Patrick Honohan Economic and Social Research Institute Abstract The resurgence of interest in currency boards prompts reconsideration of one of the Irish experience. We evaluate the institutional arrangements which underpinned the Irish pound for a half-century. While the regime did have a credibility which led to low interest rates and a degree of price stability its resilience was partly due to the large additional foreign reserves held by the private banking system and to the fact that sterling proved not to be a very strong currency. However an attempt in 1955 to evade the interest rate discipline of the regime was quickly punished with far reaching policy consequences. I am indebted to John Fitz Gerald Kieran Kennedy Colm McCarthy Pádraig McGowan Cormac Ó Gráda Brendan Walsh and an anonymous referee for helpful comments. CURRENCY BOARD OR CENTRAL BANK LESSONS FROM THE IRISH POUND S LINK WITH STERLING 1928-79 1. Introduction A currency board is an institutional arrangement for managing a currency with a fixed parity. The currency board is much more constrained than the central bank and these constraints help ensure that the fixed parity is maintained. The board s main activity is to issue a local slave currency at a fixed rate of exchange against a foreign master currency. Slave currency notes are issued only against receipt of master currency. The currency board earns seigniorage by investing the proceeds of note issue in external securities denominated in the master currency. Those that were operated in former British colonies in Africa and Asia are usually regarded as the classic examples. Surveys of this post-colonial experience are contained in Schwartz 1990 and Walters and Hanke 1992 but they hardly mention Ireland. Nevertheless the Irish currency board is an instructive case. Having been set up following national independence it survived for the best part of half a .

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