CURRENCY BOARD

CURRENCY BOARD :
- Currency Board issues currency in accordance with certain strict rules; the Board prints domestic currency and commits itself to converting it on demand to a specified currency at fixed rate of exchange.
- To make this commitment credible the board holds reserves of foreign currency (or of gold or some other liquid asset) equal to at least 100% of the domestic currency issue at the fixed rate of exchange.
- The Board issues currency only when there are enough foreign assets to back it.
- And it does little else; no open market operations; no lending to the Government; no guarantee of banking system.
- The main advantage of Currency Board Systems is it is easy to run. More over a Currency Board compels Governments to adopt a responsible fiscal policy.
- If the budget is not balanced the government has to persuade private banks to lend to it.
- Bullying the Central bank to print money is no longer an option; the currency board therefore will tend to produce more prudent fiscal policies than a malleable Central bank will.