Compare and contrast conventional pegs and currency boards. What are the factors that drive the choice between these two regimes?

Conventional pegs and currency boards are two different regimes used to manage a country’s exchange rate. Conventional pegs are when a government sets its currency’s value relative to another, more stable, currency. It allows the government, in order to keep inflation under control and to ensure stability, to set their own rate of exchange. Currency boards are based on the same principles as currency exchanges, however they have a different base unit. The currency boards also have strict rules, including that all foreign exchange reserves must be 100% backed by domestic reserves and the money in circulation can only be converted into reserves at a pegged rate. They are completely independent from central banks and also have fixed credit limits and fiscal deficit restrictions.

The choice between these two regimes is largely driven by considerations related to a country’s economic situation and policy objectives with each having its respective advantages over the other depending upon specific context. Conventional pegs provide greater flexibility for governments since they can adjust their own currencies’ values relative to other currencies in response to changes in the global economy whereas with currency boards it is very difficult for countries to pursue independent monetary policies due to strict regulations which limit their ability for intervention.

Both currency boards and conventional pegs have merits, depending on macroeconomic stability, political will, and current market trends. However, only one system may be the best for a specific situation, based on all factors taken into account.