Currency boards are an alternative mechanism for managing exchange rates from "summary" of International Financial Management, Abridged Edition by Jeff Madura
Currency boards represent an alternative mechanism for managing exchange rates. Under a currency board system, a country's central bank is required to hold reserves in the currency to which its own currency is pegged. This means that the central bank must maintain reserves equal to 100 percent or more of the local currency in circulation. By backing the local currency with reserves in a foreign currency, a currency board ensures that the exchange rate remains fixed. The primary advantage of a currency board is its ability to provide a credible commitment to a fixed exchange rate. This commitment is seen as a way to promote stability in the foreign exchange market and to instill confidence among investors. Additionally, a currency board can help to curb inflation by limiting the money supply, as the central bank is constrained by the need to hold reserves in the pegged ...
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