A currency board is an extreme form of a pegged exchange rate. Management of the exchange rate and the money supply are taken away from the nation’s central bank, if it has one. In addition to a fixed exchange rate, a currency board is also generally required to maintain reserves of the underlying foreign currency.
- A currency board is an extreme form of a pegged exchange rate.
- Often, this monetary authority has direct instructions to back all units of domestic currency in circulation with foreign currency.
- Currency boards offer stable exchange rates, which promote trade and investment.
- In a crisis, a currency board can cause substantial damage by restricting monetary policy.