Monetary Research Center

24/2021 Currency Board Regimes for Lebanon: Impacts on Asset Convertibility
Issued in Tuesday, June 1, 2021
The cascading breakdown of the Lebanese financial system has accelerating spillover effects over income, prices, and production. The economic outlook is catastrophic, and the impact of the currency crisis is directly linked to a meltdown in the productive sector, the dynamics of real income, prices, and the disruption of supply chains. To insulate the monetary base from discretionary fiscal spending, Currency Board models are advocated to restore confidence in the convertibility of assets and local currency. These regimes prove effective in reversing capital outflows and shaping the needed institutional environment for macroeconomic recovery and stability. This paper aims to provide answers to the question of whether a Currency Board system can restore asset convertibility in response to the Lebanese currency crisis. The point is to draw implications on economic recovery and stability. The analysis is focused on statistical methods that are grounded on a model theoretical approach to estimate parameters. The structure of the model is designed by a statistical classification analysis of the drivers of asset convertibility. Findings show that the suspension of convertibility is directly explained by foreign exchange parallel markets and by the reversal in capital flows. The findings also imply feedback loops in system dynamics that breed panic to fuel the crises. Results also imply that currency board models prove are adequate policies to restore confidence and the convertibility of assets and local legal tender as reserve currency is guaranteed by law under fixed exchange rates which are sterilized by the mechanism of the balance of payments. 
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