Business, Legal & Accounting Glossary
A currency board is a kind of monetary authority of a country. Its basic function is to issue of notes and coins. Currency board traces back its origin to ‘English Bank Act’ of 1844. It was primarily used in colonies. Even after decolonization, many independent nations opted for currency boards. A country’s currency board can either work independently or in conjunction with that country’s central bank. Notes and coins (of local currency) issued by currency boards are normally anchored or fixed to a foreign currency, which is known as ‘reserve currency’. This anchor currency is usually a strong international currency like the US dollar or Euro. Under the system of currency board, the stability and value of a local currency are linked directly to the stability and value of anchoring foreign currency. This implies that under this system exchange rate is fixed.
Another characteristic of a currency board is that: here monetary policy is solely determined by supply and demand of money. In simple terms, a currency board does the following things.
A Currency board abstains from the following functions.
A currency board is required to keep a certain reserve amount, which is specified by law. A currency boards’ reserves of anchor currency normally comprise low-interest bearing bonds and some other varieties of securities. In a currency board system ‘money base’ is totally backed by foreign currency reserves. Under this system, there exists no restriction on economic agents to convert local currency into anchor currency and conduct capital and current account transactions. Currency board-like systems have been implemented by independent nations like Lithuania, Estonia and some Caribbean countries. Currency boards generate ‘seignorage’. It is that profit, which is earned from the differential between interests accrued from reserve assets and expenses incurred for the maintenance of liabilities. (Liabilities include coins and notes in circulation)
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This glossary post was last updated: 26th March, 2020 | 21 Views.