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.
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
This policy objective requires the conventional objectives of a central bank to be subordinated to the exchange rate target.
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