The linked exchange rate system is a currency board system. According to the currency board system, the flow and stock of the monetary base must be fully supported by foreign exchange reserves. In other words, any change in the monetary base must be consistent with the corresponding change in foreign exchange reserves.

This is the main monetary policy objective of the HKMA Kong Monetary Authority. Under the framework of the linked exchange rate system, the government maintains exchange rate stability through prudent exchange fund management, currency operation and other appropriate measures. The important pillars of the linked exchange rate system include Hong Kong's huge official reserves, a sound and reliable banking system, a prudent financial philosophy and a flexible economic structure.

Extended data:

merits and demerits

First, advantages:

It stabilizes the currency and reduces the transaction cost of the market.

Second, the defects:

1, the linked exchange rate system is considered to be very fragile when the financial crisis comes. For example, Argentina abandoned the linked exchange rate system, greatly reduced the official exchange rate and introduced a dual exchange rate system in the ongoing turmoil of the economic crisis.

2. The central bank adopts the linked exchange rate system, so it can't play the role of lender of last resort, can't provide liquidity by loosening monetary policy, and can't directly finance troubled commercial banks. In fact, the decision-making power of monetary policy is handed over to the management authorities linked to the currency.

3. In the case of pegging to the US dollar, the central bank loses three seigniorage revenues: local currency issuance, local currency demand growth and local currency stock interest.

Baidu Encyclopedia-Linkage Exchange Rate System