Currency board
A 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.
Features of "orthodox" currency boards
The main qualities of an orthodox currency board are:
Consequences of adopting a fixed exchange rate as prime target
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.S. dollar or the euro). 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. 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.
Pros and cons
The virtue of this system is that questions of currency stability no longer apply. The drawbacks are that the country no longer has the ability to set monetary policy according to other domestic considerations, and that the fixed exchange rate will, to a large extent, also fix a country's terms of trade, irrespective of economic differences between it and its trading partners. Typically, currency boards have advantages for small, open economies which would find independent monetary policy difficult to sustain. They can also form a credible commitment to low inflation.
Examples in recent history
Worldwide use of the U.S. dollar and the euro:
  United States
  External adopters of the US dollar
  Currencies pegged to the US dollar
  Currencies pegged to the US dollar w/ narrow band
  External adopters of the euro
  Currencies pegged to the euro
  Currencies pegged to the euro w/ narrow band
Note that the Belarusian ruble is pegged to the Euro, Russian Ruble and U.S. Dollar in a currency basket.
More than 70 countries have had currency boards. Currency boards were most widespread in the early and mid 20th century.[1]
Worldwide official use of foreign currency or pegs.
  US dollar users, including the United States
  Currencies pegged to the US dollar
  Euro users, including the Eurozone
  Currencies pegged to the euro

  Australian dollar users, including Australia
  Indian rupee users and pegs, including India
  New Zealand dollar users, including New Zealand
  Pound sterling users and pegs, including the United Kingdom
  Russian ruble users, including Russia
  South African rand users (CMA, including South Africa)

  Special drawing rights or other currency basket pegs
  Three cases of a country using or pegging the currency of a neighbor
Hong Kong operates a currency board (Hong Kong Monetary Authority), as does Bulgaria. Estonia had a currency board fixed to the Deutsche Mark from 1992 to 1999 when it switched to fixing to the Euro at par. The peg to the Euro was upheld until January 2011 with Estonia's adoption of the Euro. This policy is seen as a mainstay of that country's subsequent economic success[citation needed] (see Economy of Estonia for a detailed description of the Estonian currency board). Argentina abandoned its currency board in January 2002 after a severe recession. To some, this emphasised the fact that currency boards are not irrevocable, and hence may be abandoned in the face of speculation by foreign exchange traders.[2] However, Argentina's system was not an orthodox currency board, as it did not strictly follow currency board rules – a fact which many see as the true cause of its collapse. They argue that Argentina's monetary system was an inconsistent mixture of currency board and central banking elements.[3] It is also thought that the 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. The economy fell deeper into depression before a recovery began later in the year.
The British Overseas Territories of Gibraltar, the Falkland Islands and St. Helena continue to operate currency boards, backing their locally printed currency notes with pound sterling reserves.[4]
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.
Examples against the euro
Examples against the U.S. dollar
Examples against the pound sterling
Examples against other currencies
Historical examples
See also
  1. ^ Kurt Schuler, "Currency Boards," Ph.D. dissertation, George Mason University, 1992, pp. 261-9, [1]
  2. ^ De la Torre, Augusto & Levy Yeyati, Eduardo & Schmukler, Sergio L., 2003. "Living and dying with hard pegs: the rise and fall of Argentina's currency board," Policy Research Working Paper Series 2980, The World Bank. [2]
  3. ^ Schuler, Kurt. "Ignorance and Influence: U.S. Economists on Argentina's Depression 1998-2002" (August 2005). [3]
  4. ^ History of the Monetary Systems and the Public Finances in the Bahamas, 1946-2003
Further reading
For a precise definition of what constitutes a currency board, including past examples, see:
External links
Last edited on 22 December 2020, at 15:55
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