>I accept that currency boards do put severe deflationary pressure on an
>economy when the balance of payments turns unfavourable, but I cannot see
>that logically the central bank should not be able to lower interest rates
>(the USA and Europe have just done so in 1998) or why a country with a
>currency board should not be able to have the option of changing the parity
>level with the reserve currency.
If you set up a currency board, your central bank becomes little more than a pretty building. By definition, you've given up all your autonomy in monetary policy. Who in her right mind would keep dollars in Argentina if, in the midst of a crisis, interest rates were lowered to 200 basis points below comparable U.S. rates? And if you change the parity level, you've broken your credibility bottle and spilled its contents on the floor. You can't have it both ways, Chris.
Doug