Crawling peg

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Crawling peg is an exchange rate regime usually seen as a part of fixed exchange rate regimes that allows depreciation or appreciation in an exchange rate gradually. The system is a method to fully utilize the key under the fixed exchange regimes as well as the flexibility under the floating exchange rate regime. The system is shaped to peg at a certain value but at the same time is designed to “glide” to response to external market uncertainties. In dealing to external pressure (such as interest rate differentials or changes in foreign exchange reserves) to appreciate or depreciate the exchange rate, the system can meet frequent but moderate exchange rate changes to ensure that the economic dislocation is kept minimal.[1] Some central banks use a formula that triggers a change when certain conditions are met (like need for adjustment for inflation), while others prefer not to use a preset formula and change exchange rate frequently to discourage speculations.

The main key advantages under the crawling peg system as opposed to conventional exchange rate regimes are:

  • Avoid economic instability as a result of infrequent and discrete adjustments (fixed exchange rate)[1]
  • Minimize the rate of uncertainty and volatility since the fluctuation in the exchange rate is kept minimal (floating exchange regime)[1]

This can be illustrated under the following examples:

"For example, in the 1990s, Mexico had fixed its peso with the U.S. dollar. However, due to the significant inflation in Mexico, as compared to the U.S., it was evident that the peso would need to be severely devalued. Because a rapid devaluation would create instability, Mexico put into place a crawling peg exchange rate adjustment system, and the peso was slowly devalued toward a more appropriate exchange rate." — Investopedia explains 'Crawling Peg'

In practice, the system may not be an ‘ideal system’ under certain scenario. For instance, if there is substantial currency flows that may affect the exchange rate, monetary authorities may be ‘forced’ to accelerate currency realignment - resulting substantial unsystematic costs to market players. In practice, only a couple of countries have adopted such system. Based on the AREAER 2012, only three countries have been classified under this system, namely Nicaraguan córdoba, Botswana Pula and Bolivian Boliviano.[2]

References[edit]

  1. ^ a b c Kane, D.R. (1988). Principles of International Finance. Croom Helm. p. 116. ISBN 9780709931348. Retrieved 2014-10-12. 
  2. ^ Annual Report on Exchange Arrangements and Exchange Restrictions 2012

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