Currency Board System

A Currency Board System is a monetary arrangement where a country's central bank pledges to exchange its domestic currency for a specific foreign currency at a fixed rate. It holds enough foreign currency reserves to back the total amount of its domestic currency in circulation, ensuring stability and confidence. This system limits the central bank’s ability to influence the economy through monetary policy, as its main role is to maintain the fixed exchange rate and ensure currency stability. Essentially, the domestic currency's value is directly linked to and backed by foreign currency reserves, promoting trust and reducing inflation risks.