Describe two different currency systems that have been introduced in countries such as Hong Kong and Ecuador to improve the credibility of pegged exchange rate systems
What will be an ideal response?
Hong Kong has a currency board system. A currency board is a monetary institution that issues base money (notes and coins, and required reserves of financial institutions) that is fully backed by a foreign reserve currency and fully convertible into the reserve currency at a fixed rate and on demand. Hence, the domestic currency monetary base is 100% backed by assets payable in the reserve currency. In practical terms, this requirement bars the currency board from extending credit to either the government or the banking sector. Ecuador instead has officially adopted the U.S. dollar as its currency. This is an example of ("Official") dollarization, which occurs when a foreign currency has exclusive or predominant status as full legal tender in a particular country.
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