currency board

A currency board is a monetary authority that operates under a strict legislative or statutory requirement to exchange its domestic currency for a specified foreign currency at a fixed exchange rate. This system is a form of fixed exchange rate regime.

Key features include:
* Fixed Exchange Rate: The domestic currency is pegged to a foreign currency, meaning their values are fixed relative to each other.
* No Independent Monetary Policy: The currency board cannot conduct independent monetary policy, such as setting interest rates, as its primary function is to maintain the fixed exchange rate.1
* Full Backing: The domestic currency in circulation must be fully backed by foreign currency reserves. For every unit of domestic currency issued, there must be an equivalent amount of foreign currency held by the board.1

This system aims to provide monetary stability and credibility, often adopted by smaller economies seeking to anchor their currency to a more stable foreign one.1