ABSTRACT
Estonia was the first country to leave the former ruble zone after regaining independence in 1991. Since then, the Estonian exchange rate policy has been to peg the Estonian kroon to the German mark at eight kroon to the mark. A currency board has three main features: first, narrow money is fully covered by gold and by foreign currency reserves; second, the exchange rate is fixed in the long term; and third, the monetary authority commits itself to exchange domestic currency for foreign currency, and vice versa, without any restrictions. Estonia implemented the arrangements of a currency board simultaneously with the introduction of a national currency. These principles constitute the basis for the entire Estonian monetary system. A currency board arrangement provides the authorities with a viable opportunity to liberalize capital flows without threatening the stability of the monetary system. Substantial convertibility is also essential for the automatic regulatory mechanism of the currency board to function properly.
