Question

What are the differences and similarities with Hong Kong and Argentina's currency boards? Are currency boards more credible than other exchange systems?

*Please answer both parts...with detail, thank you!*

Answer 1

Q. What are the differences and similarities with Hong Kong and Argentina's currency boards? Are currency boards more credible than other exchange systems?

Answer: Argentina maintained a currency board regime from April 1, 1991, through January 6, 2002, under which the Argentine peso was pegged one for one to the U.S. dollar. But in Hong Kong received its currency board in October 1983 but Hong Kong dollar varies time to time against the US dollar.   The permissible reserve asset for Argentina Currency board was 2/3 forex and gold and 1/3 US dollar government bond whereas in Hong Kong currency board all the permissible reserve asset in the form of foreign assets. The minimum cover for Argentina currency board is M0 i.e domestic currency but in the case of the Hong Kong currency board, the minimum cover is 105 per cent of notes and coins. For both the currency board there is no public access to exchange at the central bank.

Currency boards are associated with better inflation management as compared to the other financial system. The average inflation is always low in the currency board regime. As we know that the currency board is an exchange rate regime based on the full convertibility of local currency into a reserve currency(e.g peso to US dollar), by a fixed exchange rate and 100 per cent coverage of the monetary supply backed up with foreign currency reserves. Therefore, in the currency board system, there can be no fiduciary issuing of money which makes the currency board more credible than other exchange systems.