Monetary and Exchange Rate Policy in Lithuania: Comparative Analysis

Abstract: The paper describes Lithuanian monetary and exchange rate developments. Experiences of the other two Baltic states Estonia and Latvia have been analysed as well. New monetary and financial institutions introduced in all Baltic states facedseveral problems. One was how to maintain the credibility for new fixed exchange rates in order to preserve positive effect on the economy due to the sharp fall of the inflation. The currency board system has been proposed as a reasonable solution. Central Banks of Estonia and Lithuania are operating under the currency board arrangement. The main objective was to keep monetary expansion and inflation under control. Lithuania undertook several currency reforms. After two year experience of the floating exchange rate, the Lithuanian Government pegged Lithuanian currency to the US dollar in April 1994. From that moment the Lithuanian Central bank has been operating like strict currency board. As an outcome, inflation rates slightly went down and credibility of the Lithuanian currency, the litas, increased. The paper concludes that under an instability in the transitional economies the Currency Board can serve as an anti-inflationary tool creating convertibility and credibility effects. Moreover, the exchange rate pegging might prevent the government's inflationary policy. The period after the reforms in Lithuania and also in Estonia is too short for definitive conclusions. But, from historical point of view the currency board's arrangements in those countries helped to reach the currency credibility and economic stability to a certain extent.;