Currency Board

A currency board is the strictest form of fixed exchange rate: an arrangement under which the monetary authority commits to exchange domestic currency for a nominated anchor currency at a fixed rate, and holds foreign reserves to back the domestic money it has issued. The commitment is written into law or into the board's founding rules rather than merely stated as policy, which is what distinguishes it from an ordinary peg. The constraint that makes it distinctive sits on the issuing side. Under a currency board the authority cannot expand the domestic money supply at will, because every unit issued has to be matched by anchor-currency assets it holds; domestic interest rates therefore track the anchor economy's rather than being set independently. That buys credibility and gives up the tools a central bank would otherwise have. Currencies run this way tend to trade in a very narrow range against their anchor, and their pairs against everything else move almost entirely with the anchor.