currency board is a monetary authority which is required to maintain a fixed exchange rate with a foreign currency.
This policy objective requires the conventional objectives of a central bank to be subordinated to the exchange rate target.
1 Features of "orthodox" currency boards 2 Consequences of adopting a fixed exchange rate as prime target 3 Pros and cons 4 Examples in recent history
o o o o
4.1 Examples against the Euro 4.2 Examples against the U.S. dollar 4.3 Examples against the pound sterling 4.4 Examples against other currencies
5 Historical examples 6 See also 7 References 8 Further reading 9 External links
of "orthodox" currency boards
The main qualities of an orthodox currency board are:
A currency board's foreign currency reserves must be sufficient to ensure that all holders of its notes and coins (and all banks creditor of a Reserve Account at the currency board) can convert them into the reserve currency (usually 110–115% of the monetary base M0). A currency board maintains absolute, unlimited convertibility between its notes and coins and the currency against which they are pegged (the anchor currency), at a fixed rate of exchange, with no restrictions on current-account or capital-account transactions. A currency board only earns profit from interests on foreign reserves (less the expense of note-issuing), and does not engage in forward-exchange transactions. These foreign reserves exist (1) because local notes have been issued in exchange, or (2) because commercial banks must by regulation deposit a minimum reserve at the Currency Board. (1) generates a seignorage revenue. (2) is the revenue on minimum reserves (revenue of investment activities less cost of minimum reserves remuneration) A currency board has no discretionary powers to affect monetary policy and does not lend to the government. Governments cannot print money, and can only tax or borrow to meet their spending commitments. A currency board does not act as a lender of last resort to commercial banks, and does not regulate reserve requirements. A currency board does not attempt to manipulate interest rates by establishing a discount rate like a central bank. The peg with the foreign currency tends to keep interest rates and inflation very closely aligned to those in the country against whose currency the peg is fixed.
dollar and the euro:
pegged to the US dollar euro Currencies pegged to the euro
External adopters of the US dollar Eurozone
Currencies pegged to the US dollar w/ narrow band
External adopters of the
Currencies pegged to the euro w/ narrow bandNote that the Belarusian ruble is pegged to the
Euro. They can also form a credible commitment to low inflation. including the
Three cases of a country using or pegging the currency of a
. including India
Pound sterling users and pegs.S. and that the fixed exchange rate will. Examples
in recent history
Worldwide use of the U. to a large extent. The surplus on the balance of payments of that country is reflected by higher deposits local banks hold at the central bank as well as (initially) higher deposits of the (net) exporting firms at their local banks.
Worldwide official use of foreign currency or pegs:
to the US dollar Euro users. Dollar in a currency basket. including South Africa United Kingdom Special Drawing Rights or other currency basket pegs neighboor
U. including New Zealand
South African rand users
Indian rupee users and pegs.S. open economies which would find independent monetary policy difficult to sustain. irrespective of economic differences between it and its trading partners. The drawbacks are that the country no longer has the ability to set monetary policy according to other domestic considerations. including the Eurozone Australian dollar users. Pros
The virtue of this system is that questions of currency stability no longer apply. dollar or the euro). currency boards have advantages for small. Russian Ruble and U.Consequences
of adopting a fixed exchange rate as prime
The currency board in question will no longer issue fiat money but instead will only issue one unit of local currency for each unit (or decided amount) of foreign currency it has in its vault (often a hard currency such as the U. dollar users. including the United States Currencies pegged to the Euro
New Zealand dollar users.S. The growth of the domestic money supply can now be coupled to the additional deposits of the banks at the central bank that equals additional hard foreign exchange reserves in the hands of the central bank.S. Typically. including Australia (CMA. also fix a country's terms of trade.
Hong Kong dollar Bermudian dollar Cayman Islands dollar Djiboutian franc East Caribbean dollar (Antigua and Barbuda. Examples
against the Euro
Bulgarian lev Estonian kroon Bosnia and Herzegovina convertible mark (Konvertibilna marka) Lithuanian litas
For complete listing.  The British Overseas Territories of Gibraltar. Saint Kitts and Nevis.S. this emphasised the fact that currency boards are not irrevocable. as it did not strictly follow currency board rules . They think misunderstanding of the workings of the system by economists and policymakers contributed to the Argentine government's decision to devalue the peso in January 2002. However. Others argue that Argentina's monetary system was an inconsistent mixture of currency board and central banking elements. but in fact the Danish National Bank serves as the lender of last resort and all bank accounts are denominated in Danish
. To some. Helenacontinue to operate currency boards. and Saint Vincent and the Grenadines)
For complete listing. and this policy is seen as a mainstay of that country's subsequent economic success (see Economy of Estonia for a detailed description of the Estonian currency board). Saint Lucia.Hong Kong operates a currency board (Hong Kong Monetary Authority). as doBulgaria and Lithuania. see currencies related to the euro
against the U. and hence may be abandoned in the face of speculation by foreign exchange traders. see United States dollar
against the pound sterling
Falkland Islands pound Gibraltar pound Saint Helena pound
against other currencies
Brunei dollar. The economy fell deeper into depression before a recovery began later in the year. Estonia established a currency board pegged to theDeutsche Mark in 1992 after gaining independence. Grenada.Argentina's system was not an orthodox currency board. against the Singapore dollar Macanese pataca. Argentinaabandoned its currency board in January 2002 after a severe recession. the Falkland Islands and St. backing their locally printed currency notes with pound sterling reserves. A gold standard is a special case of a currency board where the value of the national currency is linked to the value of gold instead of a foreign currency. Dominica. against the Hong Kong dollar The Faeroe Islands have a de jure currency board.a fact which many see as the true cause of its collapse.
com currency boards on erols. including past examples. (PDF) Nikolay Nenovsky's works on Currency boards issues: (nikolaynenovsky. Argentine peso. 4. see:
Hanke. ^ History of the Monetary Systems and the Public Finances in the Bahamas. pegged against pound sterling from independence until 1979.  2.kroner. The Currency Board and the rise of banking in British East Africa.com ) Arnaldo Mauri. ^ Schuler. pp203–222. University of Milan. Steve H. (PDF)
For a precise definition of what constitutes a currency board.S. (2002): On Dollarization and Currency Boards: Error and Deception.P. Journal of Policy Reform Vol. Department of Economics. n. Historical
Currency boards and dollarization Basics on currency boards on erols. The Danish National Bank refers to the Faroese króna as a "special version" of the Danish krone. Seminar Paper. Rajnish (2003): Post-Crisis Exchange Rate Regimes in Southeast Asia. 102007. pegged against the United States dollar until 2002. Kurt. 1946-2003
Central bank Dollarization Monetary policy Argentine Currency Board
1. W. Economists on Argentina's Depression 1998-2002" (August 2005). 5 no. "Ignorance and Influence: U. University of Hamburg.