Buks Wessels, University of the Free State, South Africa
Abstract: The paper examines the nature, operation, benefits and disadvantages of CBA’s as a super-fixed exchange rate solution to policy problems caused by volatile exchange rates for governments, central banks, and financial markets regarding transaction costs, inflationary expectations and macroeconomic stability in general. The paper argues that benefits from CBA’s will include: improved policy credibility, lower inflation and interest rate levels, increased economic growth, increased foreign capital flows, exchange rate stability and sharply reduced currency speculation. However there are also several shortcomings of CBA’s, such as the absence of a lender of last resort, real exchange rate misalignments and their consequences for the economy. The paper also discusses the type of country that would be the most likely candidate to benefit from a CBA as an appropriate exchange rate regime.
