Demystifying Steve Hanke — Currency Boards Fanciful?

There’s been remarkable interest in what Steve H. Hanke, Professor of Applied Economics at the John Hopkins University, writes about Ghana’s economic indices and situation, especially since the period of crisis begun. His tweets, controversially-themed in undermining either official exchange rate depreciation figures or inflationary rates, have predominantly featured in Ghanaian online portals, and sometimes making waves on traditional tabloids.

I attempt in this piece to throw more lights on who he is, and what his advocacy considerably represents.

Who is he?

His resume says Steve has since the age of 24 been teaching courses in economics, or related subjects. It also adds that he is one of few people to have had a fast rise to a professorial rank at the University of California, Berkley. He has taught in several other faculties, in a period that sums to well over five decades.

At age 79, his area of interest, in contemporary times has moved away from water resource economics (his PhD interest) to these: dollarisation, currency board, and hyper-inflation.

Ofcourse, all these three have a relationship, of which Steve is superbly versed, both in the theoretical and the empirical depth.

He played an important role in establishing new currency regimes in Argentina, Estonia, Bulgaria, Bosnia-Herzegovina, Ecuador, Lithuania, and Montenegro. He has served as advisor to these countries, including Albania, Kazakhstan, the United Arab Emirates, and Yugoslavia, per his resume.

His Philosophy?

From the 90s, through to this day, his philosophy in currency and inflation deliberations has attracted the scorn of several respected national and global economic institutions, like the Federal Reserve Board, and the IMF. These firms aside, other modern authorities of the economic study field has found his ideas bewildering. One of such is the iconic, Paul Krugman.

Paul described him as a snake-oil salesman.

The catch is, Steve has a singular panacea he unreservedly prescribes for all economies facing currency and hyperinflation crisis. And that is, dollarisation. It’s that simple.

To us the laymen, dollarisation is the currency system in which a nation adopts the US currency (USD) as its official or unofficial currency, in order to stem rising inflation. Of course, the US inflation, is often more stable, and since inflation is simply a reflection of the value of the currency, adopting the US dollar would inspire some price stability.

But that is rather simplistic.

To operate such a policy, an economy would often require a currency board. And Steve unsurprisingly is the leading fan of currency boards. That idea is not tolerated by many hardcore economists like Paul Krugman, and that is why he figuratively maintains that Steve is only skilled in selling snake-oil.

But Steve is well grounded in the economics of currency boards and he argues forthrightly of its essence. Currency boards don’t superintend the financial space like Central banks do. The latter is a lender of last resort, but Currency boards don’t lend to governments through printed notes, like central banks. Thus, with the presence of these boards, fiscal dominance is absolutely a zero-phenomenon.

Then also, currency boards employ a reserve standard. That means, for every unit of local currency issued, there should be a corresponding reserve backing, either with a global high-worth commodity like gold, or with a basket of internationally convertible currencies.

So when Steve led his colleagues to advocate this policy for adoption by Argentina in the late nineties, the peso decline was halted, however interest rate challenges persisted and that eventually led to the collapse of the policy, and an interesting u-turn.

And there have been several other u-turns.

When Indonesia, Asia’s 3rd largest country faced economic challenges in late 90s, their President was on the brink of accepting the Hanke idea of currency boards — dollarisation, until a superior mix of policy and initiatives intervened.

In summary, dollarisation is an expensive panacea. Far more costly to a troubled economy. However, currency boards, are not entirely a fictional concept like sometimes it appears, it stems inflationary pressures. Yet, you won’t easily prescribe that idea to a nation with a slim reserve bed.

Hanke’s Inflation Measurement?

I surmise there are many of us interested in how Prof. Hanke arrives at his inflationary measure, which is often double portion or far-off the local official rate.

But who else has realized that he is yet to publish figures disputing US, UK or Eurozone inflation rate?

Okay, his method is quite mesmerizing, and I am sure it astounds, even the IMF. He merely, bases on the concept of relative purchasing power parity, to transform the exchange rates between two economies, mostly the US—and—another—weaker one.

The Concept of Relative Purchasing Power parity supposes that the exchange rate between two countries, are effectively discounted by the amount of goods a unit of an international currency can purchase locally.

By that concept, as at end of 2021, the real purchasing power equivalent of 1 dollar, was 2.34 cedis, as computed by the World Bank. At the time, a dollar exchanged averagely for 6 cedis on the market.

However, Hanke avers that the most important priced commodity in any open-economy is the ‘exchange rate’. And not merely the exchange rate between the US dollar and the local currency, but actually the black-market price. The rationale, is that, even in trade-liberal economies, like Ghana, there’s some notable disparity between the official exchange rate and the real market rate. And it is the price from the black (read - unofficial) market that gives the true market rate.

He employs the spot exchange rate depreciation of USD/LocalCurrency (USD/GHS in Ghana’s case) within the year, in percentage terms, and transforms that with the prevailing US inflation value to determine the supposed inflation rate of the local currency, just as used to determine purchasing price parity against a basket of goods.

Hence the formula:

Local inflation = (US (CPI) Inflation rate x USD/GHS depreciation rate) - 1.

Thus yesterday, he published a rate of 81% as Ghana’s inflation rate per his dashboard. This is how he arrived at this figure:

On 1st September 2021, the dollar was trading for 6.02 cedis on the market (not official rates). On 1st September 2022, it traded for 10.04 cedis on the same market. This constitutes a price change of roughly 67%.

Now, using September 2021 as base, the price of the USD is calculated at 167% against the cedi in September 2022. [167% ~ 1.67]

The US inflation rate prevailing is 8.5%. That simply means, prices have generally risen to 108.5%, from same month last year to same time this year. [108.5% ~ 1.085]


Hanke’s inflation for Gh => (1.085 x 1.67) - 1 = 81%.

However, for this figure to suffice, and render the Ghana Statistical Service’s monthly CPI rate, which considers the price change in a basket of over 39,000 products across 14 consumer divisions ranging inter-alia healthcare, education, transport — bogus, some assumptions must be discussed and highlighted.

Does the GSS factor the price of imported goods in their CPI calculation? Matter of fact, since February 2022, imported inflation has trounced local inflation month on month on this CPI index. From the July CPI figures published, inflation of imported products stood at 33.9% while local inflation was recorded at 30.9%.

Is Hanke’s calculation an embellished approach aimed at provoking our attention towards his currency board — dollarisation panacea, or it’s actually about time?