Currency board's resume; system's pros and cons<\/p>\n
SINGAPORE (Reuters): Indonesia has said it is exploring the
\npossibility of establishing a currency board to maintain the
\nvalue of the rupiah.<\/p>\n
The following is a brief resume of how a traditional currency
\nboard works and some of the pros and cons of using such a system.<\/p>\n
A currency board<\/p>\n
- Fixes or pegs a currency to another currency at a set rate.<\/p>\n
- Sidelines the central bank in as much as the country
\nestablishing the board vows to hold enough of the foreign
\ncurrency to which its unit is pegged to cover all local notes and
\ncoins in circulation.<\/p>\n
- Holds low-risk bonds and other assets payable in the anchor
\ncurrency.<\/p>\n
- Pledges to exchange local currency for the peg currency at a
\nfixed exchange rate.<\/p>\n
- Removes interest rate control from the central bank (or the
\nauthorities). Interest rates are instead dictated by supply and
\ndemand for the local currency.<\/p>\n
- The board earns profits from the difference between the
\ninterest it earns from anchor-currency assets and the cost of
\nmaintaining notes and coins in circulation.<\/p>\n
Some of the pros<\/p>\n
- The exchange rate is fixed to an anchor currency, giving
\npredictability.<\/p>\n
- Foreign reserves have to be a minimum of 100 percent of the
\nlocal coins and notes in circulation.<\/p>\n
- There is full convertibility.<\/p>\n
- A currency board should be protected from political
\npressures.<\/p>\n
- The board's rules are transparent.<\/p>\n
- The local currency is effectively linked to monetary and
\nfiscal policy of the anchor currency's country, and will benefit
\nor suffer from the results of those policies.<\/p>\n
Some of the cons<\/p>\n
- If the fixed rate is set at an inappropriate level the peg
\nwill be in danger of immediate collapse because of unbalanced
\ncurrency flows.<\/p>\n
- If a futures market is established, speculators can attack
\nthe currency there, forcing up interest rates.<\/p>\n
- Interest rates will be controlled by external forces and
\ncannot be changed, for example, to boost domestic demand or
\ndampen inflation.<\/p>\n
- A black market may develop if the rate is incorrectly set
\nand flows move against the local currency.<\/p>\n
The following is a list of countries which have currency
\nboards.<\/p>\n
Country Link currency Year established<\/p>\n
----------------------------------------------------<\/p>\n
Hong Kong U.S. dollar 1983<\/p>\n
Argentina U.S. dollar 1991<\/p>\n
Estonia Mark 1992<\/p>\n
Lithuania U.S. dollar 1994<\/p>\n
Bosnia Mark 1995<\/p>\n
Bulgaria Mark 1997<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/currency-boards-resume-systems-pros-and-cons-1447893297", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }