Currency and monetary arrangements for East Timor

Abstract

East Timor faces an important decision in choosing its currency and monetary arrangements. This paper sets out the policy issues in deciding whether to fix or float the currency, including implications for the choice of the framework for monetary policy. It assesses the relative merits of different fixed exchange-rate regimes, including the standard peg, currency board and ‘dollarisation’ (by which a country decides to use another country’s currency as its own), and of different target currencies, including the euro, the rupiah, the US dollar and the Australian dollar. It argues that East Timor should adopt a strongly fixed exchange rate. The best option is probably dollarisation using either the US dollar or the Australian dollar.