Currency board
Topic: Balance of Payments and Exchange Rates · NCERT: Beyond NCERT
Meaning
A currency board is a very strict form of fixed exchange rate. The domestic currency is issued only against full backing in a foreign reserve currency, at a fixed rate. Every note in circulation is matched by foreign reserves. Because the money supply is tied to the reserves, the central bank gives up an independent monetary policy. The benefit is high credibility, which makes speculative attacks less likely. The cost is that the country cannot use interest rates or money supply to handle a slowdown.
Example
Hong Kong has run a currency board since 1983. It keeps the Hong Kong dollar at about HK$7.8 per US dollar. New Hong Kong dollars can be issued only when matching US dollars are held in reserve.
Don't confuse with
- Dollarisation: the country uses the US dollar itself and has no currency of its own. A currency board keeps its own currency, fully backed.
- Conventional peg: the rate is fixed but not fully backed by reserves, so the peg is easier to abandon.
Related concepts
- Fixed exchange rate
- Devaluation
- Revaluation
- Black market for foreign exchange
- Speculative attack
- Managed floating
- Forex intervention
- Crawling peg
- Impossible trinity
- Competitive devaluation