A Mexican Currency Board?

A lack of confidence in the peso’s purchasing power was fundamental to Mexico’s recent currency crisis and remains central to the nation’s convalescence. In establishing a credible commitment to price stability, countries face a trade-off between 1) adopting institutional forms that limit their government’s ability to generate inflation and 2) relying on an established reputation for successfully controlling the price level. Recognizing that those countries lacking such a reputation must compensate with strong institutional limits on their monetary policy discretion, many economists have suggested that Mexico replace its central bank with a currency board.