gjaldmiðilsstjórn

Gjaldmiðilsstjórn, often translated as currency board, is a monetary system where a country's currency is backed by a foreign currency. Under a currency board, the domestic currency is issued by a monetary authority, and its value is fixed to a specific foreign currency. The monetary authority must hold sufficient foreign currency reserves to cover the entire domestic money supply at the fixed exchange rate. This means that every unit of domestic currency in circulation must be backed by an equivalent amount of the foreign reserve currency. The primary goal of a currency board is to maintain exchange rate stability and often to import the monetary credibility of the anchor currency country. This system typically eliminates independent monetary policy, as the money supply is determined by the balance of payments and the demand for domestic currency. Interest rates in a currency board system tend to follow those of the anchor currency. Examples of countries that have used currency boards include Hong Kong and Bulgaria. The strict rules of a currency board limit the central bank's ability to act as a lender of last resort or to manage inflation through traditional monetary policy tools.