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A currency board does not attempt to manipulate interest rates by establishing a discount rate like a central bank. The peg with the foreign currency tends to keep interest rates and inflation very closely aligned to those in the country against whose currency the peg is fixed.

Key Takeaways. A currency board is an extreme form of a pegged exchange rate. Often, this monetary authority has direct instructions to back all units of domestic currency in circulation with foreign currency. Currency boards offer stable exchange rates, which promote trade and investment.

Currency pegging is when a country attaches, or pegs, its exchange rate to another currency, or basket of currencies, or another measure of value, such as gold. Pegging is sometimes referred to as a fixed exchange rate.

Currency Board Arrangements. A monetary regime based on an explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate, combined with restrictions on the issuing authority to ensure the fulfillment of its legal obligation.

Currency boards normally aim to hold a somewhat larger value of assets than the value of their liabilities in order to guard against the risk that the market value of their assets will diminish?for example, due to a rise in interest rates in the reserve-currency country.

The important features of Currency Board are a fixed exchange rate, backing requirement, unrestricted convertibility, and legal commitment. It's a strong pegged exchange rate regime and contributes to lower inflation and interest rates.

What Is a Currency Peg? A currency peg is a policy in which a national government or central bank sets a fixed exchange rate for its currency with a foreign currency or a basket of currencies and stabilizes the exchange rate between countries.