ABSTRACT
The main argument for pegging the exchange rate, in my view, is that it may help impose monetary discipline on a country's government and reduce its scope for running monetary policies that result in home-country inflation crises. A currency board is likely the best pegging scheme for imposing discipline. Exchange rate adjustments can be usefully thought of in terms of Type I and Type II errors. An exchange rate authority may mistakenly change the peg when the better policy is to maintain it, or may maintain the peg when the better policy is to change it. A currency board is a combination of familiar elements. It is an exchange rate system in which the currency is pegged but with exchange rate adjustment mandated or allowed under conditions that are more or less, but never completely, spelled out. A domestic monetary agency parallel to the currency board might expand liquidity, as measured by the domestic money stock, through open market operations.
