Currency board
A monetary system that fixes a currency’s value to another currency and issues domestic money only under strict reserve-backed rules.
Fixed exchange rate: An exchange-rate regime that keeps a currency’s value fixed against another currency or a basket. A currency board enforces this arrangement through a legal commitment and constrained money issuance.
Central bank: A public institution that manages a country’s money, monetary policy, or financial system. Unlike a conventional central bank, a currency board has little discretion to expand the monetary base.
Hong Kong dollar: The currency of Hong Kong, maintained under a linked exchange-rate system against the US dollar. Hong Kong’s system is a prominent currency-board-style arrangement, with a defined convertibility zone.
Monetary policy: The actions authorities take to influence money, credit, interest rates, and economic conditions. A currency board sharply constrains independent monetary policy by tying money creation to foreign reserves.
Foreign-exchange reserves: Foreign-currency assets held by a central bank or monetary authority. These reserves back the domestic monetary base and support conversion at the board’s fixed rate.
Dollarization: The adoption of a foreign currency, often the US dollar, as domestic legal tender or a major medium of exchange. Dollarization removes the national currency, while a currency board preserves it at a fixed conversion rate.
Estonian kroon: Estonia’s national currency from 1992 until adoption of the euro in 2011. Estonia used a currency board to anchor its post-Soviet currency to the Deutsche Mark and later the euro.
Seigniorage: Government revenue derived from issuing money, including the value of money beyond its production cost. Reserve-backed issuance limits the scope for financing public spending through domestic money creation.
Monetary base: Currency in circulation plus commercial banks’ reserve balances at the central bank. Currency-board rules link the size of this liability to available foreign reserves.
Currency peg: A policy that fixes a currency’s value to another currency or a basket of currencies. A currency board is a particularly rule-bound form of currency peg.