21-5 Exchange Rate Strategies Currency Boards 1.Domestic currency is backed 100% by a foreign currency and is automatically exchanged at fixed rate for the foreign currency. 2.Strong commitment by the central bank to the fixed exchange rate → effective in bringing down inflation quickly and decrease the likelihood of speculative attacks against the currency. 3.Usual disadvantages of fixed exchange rate regime. 4.The currency may still be subject to speculative attack.
21-6 Exchange Rate Strategies Dollarization 1.Adopt a foreign currency like the U.S. dollar as the country’s money → even stronger commitment mechanism → no possibility of speculative attack. 2.Usual disadvantages of fixed exchange rate regime. 3.Lose seignorage (the revenue that a government receives by issuing money). Governments (or their central banks) do not pay interest on their currency, but use the currency to purchase income-earning assets such as bonds.