Currency board is an arrangement, where a country abandons its domestic currency and adopts a strong foreign currency like the dollar.

A currency board is a monetary policy arrangement in which a country's central bank holds reserves of a strong foreign currency (e.g., the US dollar) and issues domestic currency that is pegged to, and fully convertible into, the foreign currency at a fixed exchange rate. This means that the central bank is committed to maintaining the fixed exchange rate by buying and selling its domestic currency for the foreign currency.

When a country decides to adopt a foreign currency through a currency board arrangement, it must follow these steps: 1. Establish a currency board, which is an independent authority responsible for managing the country's monetary policy. 2. Determine the fixed exchange rate between the domestic currency and the foreign currency. 3. Collect sufficient foreign currency reserves to guarantee the convertibility of the domestic currency. 4. Issue new domestic currency that is pegged to the foreign currency and fully convertible into it.

A currency board arrangement offers several benefits for the adopting country, including: 1. Exchange Rate Stability: By pegging the domestic currency to a strong and stable foreign currency, the adopting country can achieve greater exchange rate stability, reducing risks for businesses and investors. 2. Lower Inflation: A currency board can help lower inflation by tying the domestic money supply to the foreign currency reserves. This prevents the central bank from printing money excessively and causing inflation. 3. Increased Confidence: A currency board can increase confidence in the domestic currency, as it is now backed by the strong foreign currency, leading to increased investment and economic growth.

However, there are also some drawbacks to a currency board arrangement, such as: 1. Loss of Monetary Policy Independence: By adopting a currency board, the country loses its ability to implement independent monetary policies, like adjusting interest rates, as the domestic money supply is now linked to the foreign currency reserves. 2. No Lender of Last Resort: The central bank loses its role as a lender of last resort, which means that it cannot print money to rescue financial institutions in trouble, potentially making the financial system more vulnerable. 3. Adjustment Difficulties: It can be challenging for the economy to adjust to external shocks, such as changes in the terms of trade or capital flows, as the exchange rate is fixed and cannot be used as a tool to absorb these shocks. This might result in increased economic fluctuations and unemployment.