Forex

Foreign currency trading drawbacks

This policy objective requires the conventional objectives of a central bank to be subordinated to the exchange rate target. A currency board has no discretionary powers to affect monetary policy and does not lend to the government. Governments cannot print money, and can only tax or borrow to meet their spending commitments. A currency board does not act as a lender of last resort to commercial banks, and does not regulate reserve requirements.

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. The virtue of this system is that questions of currency stability no longer apply. The drawbacks are that the country no longer has the ability to set monetary policy according to other domestic considerations, and that the fixed exchange rate will, to a large extent, also fix a country’s terms of trade, irrespective of economic differences between it and its trading partners.

Note that the Belarusian ruble is pegged to the Euro, Russian Ruble and U. More than 70 countries have had currency boards. Currency boards were most widespread in the early and mid 20th century. Worldwide official use of foreign currency or pegs. The British Overseas Territories of Gibraltar, the Falkland Islands and St. A gold standard is a special case of a currency board where the value of the national currency is linked to the value of gold instead of a foreign currency. The Faeroe Islands have a de jure currency board, but in fact the Danish National Bank serves as the lender of last resort and all bank accounts are denominated in Danish kroner.

Argentine peso, pegged against the United States dollar from 1991-2002. Bahraini dinar, fixed against the pound sterling from 1966-1973. Bahamian dollar was fixed against to the United States dollar from 1966-1968. Bosnia and Herzegovina convertible mark, fixed against the Deutsche Mark from 1998 until 2002. British West African pound, fixed against the pound sterling from 1913-1964. Irish pound, pegged against pound sterling from independence until 1979, issued by a currency board until 1942. East African shilling, fixed against the pound sterling from 1921-1969.

Estonian kroon, fixed against the Deutsche Mark from independence in 1992 until 1999. Fixed to the Euro thereafter until 2011. Lithuanian litas, fixed against the US dollar from 1994 until 2002. Fixed to the Euro thereafter until 2015 when the litas was replaced with the euro. Living and dying with hard pegs: the rise and fall of Argentina’s currency board,” Policy Research Working Paper Series 2980, The World Bank. Post-Crisis Exchange Rate Regimes in Southeast Asia: An Empirical Survey of De-Facto Policies, Seminar Paper, University of Hamburg.

On Currency Boards: An Updated Bibliography of Scholarly Writings. Arnaldo Mauri, The Currency Board and the rise of banking in British East Africa, W. 10-2007, Department of Economics, University of Milan. A traveler’s check is a medium of exchange utilized as an alternative to hard currency. The product typically is used by people on vacation in foreign countries. They offer a safe way to travel overseas without cash.