in its 'pure' form, a currency board can only issue domestic notes when it has an equivalent amount of a designated foreign currency as international reserves at a fixed exchange rate...this supposedly imposes discipline on the conduct of economic policy, where money expansion is permited if a balance of payments surplus exists... exchange rate stability is ostensibly supported by such discipline...
Hong Kong's linked exchange rate (HK$ pegged to US$ at rate of $7.80 since 1983) differs from both 19th century currency boards - first established in Mauritius in 1849, about 70 economies adopted similar arrangements through the early 1900s, boards were abandoned in post-WW2 period - and modern currency board model - sometimes called AEL after Argentina (1991), Estonia (1992), and Lithuania (1994), about ten economies have adopted such a system...
an an exchange rate system, a currency board differs from a pegged rate regime based on foreign exchange control or market intervention by the monetary authority..it relies on fixing a parity rate on a narrow definition of money (bank notes) that the authority can control (based on adequate reserves)...like the gold standard, it stipulates concurrent arrangements that invoke arbitrage and competition activiites which will push the exchange rate on wider definitions of money (deposits) towards the parity rate if a deviation between the two rates occurs...
with currency boards, notes are issues either by a genuine currency board or a unit in the central bank, but HK$ bank notes are issued by authorized note-issuing banks (NIBs) outside the Hong Kong gov't. ..an indirect note issuing and withdrawal mechanism (NIWM) is in operation...in the AEL model, a centalized clearing and reserves system is operated by the central bank, which deals directly with each bank...no such system exists in HK...
what the Hong Kong Monetary Authority (HKMA) recently did was engage in stock and futures market operations for the purpose of trying to push out currency speculators engaged in both dumping the HK$ and shorting local stocks and Hang Seng Index futures...Michael Hoover