What Is a Currency Board?

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.

KEY TAKEAWAYS

  • 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.

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