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. This allows the government to fix their own exchange rate in order to maintain stability and control inflation. Currency boards operate on similar principles but differ in that they use an external currency such as the US dollar or Euro as their base unit of account. They also require stringent rules and conditions including 100% backing by foreign reserves, full convertibility of domestic money into foreign reserves at the pegged exchange rate, complete independence from central banks, fixed limits on credit creation and restrictions on fiscal deficits.

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.

Overall both conventional pegs and currency boards have their merits depending on factors such as macroeconomic stability , political will ,and current market trends however only one regime may be best suited for a particular situation based upon all relevant components taken into consideration .Therefore careful deliberation should take place prior committing any decisions so as not make rash choices that could potentially backfire down the line resulting in worse outcomes than before any regime was even implemented in first place