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- Last Posted: 2017-06-28 08:35:07
How Does a Currency Board Work?2017-06-28 08:35:07
Essentially, the currency board of a specific nation or area is tapped to release banknotes and coins and keeping fixed exchange rate that is based on either a commodity or foreign currency. It can perform its duties solely or work together with a central bank. Normally, the board is created to take away the duty of a central bank to manage rates and money.
All actions or discretions by a monetary authority do not shape the monetary policy of a country in the presence of the board. Rather, it is shaped by certain economic factors. The board is merely responsible for releasing currencies and making the local tender into the reserve currency at a preset rate.
The currency board we normally see has no powers to plan and alter interest rates by determining a discount rate. Since the board does not give any funding to banks, financial institutions, or governments, the government can only obtain money via borrowing or taxation, not by producing additional money.
For the board to operate in full swing, the whole reserve must be accessible at least and they should possess a long-term pledge. It is commissioned to utilize a predetermined rate and retain the least amount of reservoir as outlined in the decree. In terms of assets, it should enough coins and notes being circulated to shoulder related expenses. Therefore, the money base is fully supported by offshore reserves. It will posses a little over 100% to shoulder all of its accountabilities.
The board should possess the capability to make the local currency into the anchor one, meaning no prohibitions are in place. However, they are not the final lender to turn to in a banking scheme since it does not supervise any deposit.
Basically various colonies have established their own currency boards through the years, where the economies of the local nation and the mother nation are connected. As of today, the boards employ a combination of methodologies when fulfilling their tasks as the overseer of the entire monetary scheme.