Although a currency board is a common (and simple) way of maintaining a fixed exchange rate, it is not the only way. Countries often keep exchange rates within a narrow band by regulating balance of payments through various capital controls, or though international agreements, among other methods. Thus, a rough peg may be maintained without a currency board.
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 bank creditors of a Reserve Account at the currency board) can convert them into the reserve currency (usually 110–115% of the monetary baseM0).
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 interest 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.
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.
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 (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.[3] 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.[4] 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.
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.
The Faroe Islands have a de jure currency board, but in fact the Danish National Bank serves as the lender of last resort and all bank accounts are denominated in Danish kroner. The Danish National Bank refers to the Faroese króna as a "special version" of the Danish krone. Danish kroner itself is partly back by Euro foreign reserve of Danish National Bank
^Hawkins, John (2015). "History of Economic Thought Concerning Currency Boards". from the original on 2021-12-03. Retrieved 3 December 2021.
^Kurt Schuler, "Currency Boards," Ph.D. dissertation, George Mason University, 1992, pp. 261-9, [1]
^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]
^Schuler, Kurt. "Ignorance and Influence: U.S. Economists on Argentina's Depression 1998-2002" (August 2005). [3]
^History of the Monetary Systems and the Public Finances in the Bahamas, 1946-2003
Further reading
Tiwari, Rajnish (2003): Post-Crisis Exchange Rate Regimes in Southeast Asia: An Empirical Survey of De-Facto Policies, Seminar Paper, University of Hamburg. (PDF)
"On Currency Boards: An Updated Bibliography of Scholarly Writings." ()
Steve H. Hanke and Kurt Schuler, Currency Boards for Developing Countries: A Handbook (1994, revised edition 2015).
For a precise definition of what constitutes a currency board, including past examples, see:
Hanke, Steve H. (2002): "On Dollarization and Currency Boards: Error and Deception," Journal of Policy Reform, Vol. 5, no. 4, pp. 203–222. ()
Nikolay Nenovsky's works on Currency boards issues: (nikolaynenovsky.com )
Arnaldo Mauri, The Currency Board and the rise of banking in British East Africa, W.P. n. 10-2007, Department of Economics, University of Milan. Abstract in English.[6]
External links
Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise, Currency Board Book Series, Studies in Applied Economics working paper series (includes many papers on currency boards),, and Digital Archive on Currency Boards.
March 03, 2023
currency, board, public, finance, currency, board, monetary, authority, which, required, maintain, fixed, exchange, rate, with, foreign, currency, this, policy, objective, requires, conventional, objectives, central, bank, subordinated, exchange, rate, target,. In public finance 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 In colonial administration currency boards were popular because of the advantages of printing appropriate denominations for local conditions and it also benefited the colony with the seigniorage revenue However after World War II many independent countries preferred to have central banks and independent currencies 1 Although a currency board is a common and simple way of maintaining a fixed exchange rate it is not the only way Countries often keep exchange rates within a narrow band by regulating balance of payments through various capital controls or though international agreements among other methods Thus a rough peg may be maintained without a currency board Contents 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 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 linksFeatures of orthodox currency boards EditThe 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 bank creditors 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 interest 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 Consequences of adopting a fixed exchange rate as prime target EditThe 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 EditThe 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 Edit 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 Eurozone External adopters of the euro Currencies pegged to the euro Currencies pegged to the euro w narrow band Note that the Belarusian rubel is pegged to the Euro Russian rouble 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 2 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 Sterling users and pegs including the United Kingdom Russian rouble 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 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 3 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 4 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 sterling reserves 5 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 Edit Bulgarian lev Bosnia and Herzegovina convertible mark Konvertibilna marka Examples against the U S dollar Edit Hong Kong dollar Bermudian dollar Cayman Islands dollar Djiboutian franc East Caribbean dollar Antigua and Barbuda Dominica Grenada Saint Kitts and Nevis Saint Lucia and Saint Vincent and the Grenadines For complete listing see United States dollarExamples against the pound sterling Edit Falkland Islands pound Gibraltar pound Saint Helena poundExamples against other currencies Edit Brunei dollar against the Singapore dollar Macanese pataca against the Hong Kong dollar The Faroe Islands have a de jure currency board but in fact the Danish National Bank serves as the lender of last resort and all bank accounts are denominated in Danish kroner The Danish National Bank refers to the Faroese krona as a special version of the Danish krone Danish kroner itself is partly back by Euro foreign reserve of Danish National BankHistorical examples EditArgentine peso pegged against the United States dollar from 1991 until 2002 Bahraini dinar fixed against the pound sterling from 1966 until 1973 Bahamian pound fixed against the pound sterling from 1921 until 1966 Bahamian dollar was fixed against the United States dollar from 1966 until 1968 Bosnia and Herzegovina convertible mark fixed against the Deutsche Mark from 1998 until 2002 Fixed to the Euro thereafter British West African pound fixed against the pound sterling from 1913 until 1964 Ceylonese Rupee fixed against the Indian silver rupee from 1884 until 1950 Irish pound pegged against pound sterling from independence until 1979 issued by a currency board until 1942 East African shilling fixed against the pound sterling from 1921 until 1969 Estonian kroon fixed against the Deutsche Mark from independence in 1992 until 1999 Fixed to the Euro thereafter until 2011 Lithuanian litas fixed against the US dollar from 1994 until 2002 Fixed to the euro thereafter until 2015 when the litas was replaced with the euro See also EditCentral bank Dollarization Monetary policy Argentine Currency Board Linked exchange rate system in Hong KongReferences Edit Hawkins John 2015 History of Economic Thought Concerning Currency Boards Archived from the original on 2021 12 03 Retrieved 3 December 2021 Kurt Schuler Currency Boards Ph D dissertation George Mason University 1992 pp 261 9 1 De la Torre Augusto amp Levy Yeyati Eduardo amp 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 Schuler Kurt Ignorance and Influence U S Economists on Argentina s Depression 1998 2002 August 2005 3 History of the Monetary Systems and the Public Finances in the Bahamas 1946 2003Further reading EditTiwari Rajnish 2003 Post Crisis Exchange Rate Regimes in Southeast Asia An Empirical Survey of De Facto Policies Seminar Paper University of Hamburg PDF On Currency Boards An Updated Bibliography of Scholarly Writings 4 Steve H Hanke and Kurt Schuler Currency Boards for Developing Countries A Handbook 1994 revised edition 2015 5 For a precise definition of what constitutes a currency board including past examples see Hanke Steve H 2002 On Dollarization and Currency Boards Error and Deception Journal of Policy Reform Vol 5 no 4 pp 203 222 PDF Nikolay Nenovsky s works on Currency boards issues nikolaynenovsky com Arnaldo Mauri The Currency Board and the rise of banking in British East Africa W P n 10 2007 Department of Economics University of Milan Abstract in English 6 External links EditCurrency boards and dollarization archived Web site Johns Hopkins Institute for Applied Economics Global Health and the Study of Business Enterprise Currency Board Book Series 7 Studies in Applied Economics working paper series includes many papers on currency boards 8 and Digital Archive on Currency Boards 9 Retrieved from https en wikipedia org w index php title Currency board amp oldid 1122932303, wikipedia, wiki, book, books, library,
