The system is a method to fully use 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 respond to external market uncertainties.
To react to external pressure (such as interest rate differentials or changes in foreign-exchange reserves) to appreciate or depreciate the exchange rate, the system can have moderately-sized, frequent exchange rate changes to ensure that the economic dislocation is minimized.
Some central banks use a formula that triggers a change when certain conditions are met, while others prefer not to use a preset formula and frequently change the exchange rate to discourage speculations.
Advantages and disadvantages
The main advantages of a crawling peg are:
- Avoid economic instability as a result of infrequent and discrete adjustments (fixed exchange rate)
- Minimize the rate of uncertainty and volatility since the fluctuation in the exchange rate is kept minimal (floating exchange regime)
In practice, the system may not be an "ideal system" under certain scenarios. For instance, if there is substantial currency flows that may affect the exchange rate, monetary authorities may be "forced" to accelerate currency realignment, leading to substantial unsystematic costs to market players. In practice, only a few countries have adopted crawling pegs.
E. Ray Canterbery proposes an idea of a delayed peg to eliminate many disadvantages of the crawling peg model. The delayed peg uses a wide band for exchange-rate fluctuations, while the band is allowed to move when foreign exchange liabilities accumulate (at a secret but predetermined rate). In China a new use of a "floating band" is essentially a delayed peg.
Economies using crawling peg
According to the IMF's "Annual Report on Exchange Arrangements and Exchange Restrictions 2014", only two countries—Nicaragua's córdoba and Botswana's pula—had a crawling-peg exchange rate arrangement at the time.
- China uses a floating band model, that is essentially a delayed peg
- The Nicaraguan córdoba has used a crawling peg since 1991.
- The economy of Botswana used a floating peg model until 2005.
- The economy of Vietnam uses a crawling peg model as of June 28, 2013.
- The economy of Argentina used, then abandoned a crawling peg model in 1979 named tablita.
- The Ecuadorian sucre had a crawling peg model until it was replaced with USD in March 2000.
- The Uruguayan peso was on a crawling peg model (tablita) from 1973 until a banking crisis in 2002.
- The Costa Rican colón was on a crawling peg model until October 17, 2006.
- Daniel R. Kane (1988). Principles of International Finance. Croom Helm. p. 116. ISBN 9780709931348.
- "Crawling Peg". Investopedia. Retrieved 2016-01-13.
- E. Ray Canterbery (2011). The Global Great Recession. World Scientific. ISBN 978-981-4322-77-5.
- Gang Yi, The People's Bank of China, "Exchange Rate Arrangement: Flexible and Fixed Exchange Rate Debate Revisited, IMF, April 16–17, 2013, pp. 5-6.
- Annual Report on Exchange Arrangements and Exchange Restrictions 2014 (PDF). Washington, D.C.: International Monetary Fund. October 2014. p. 6. ISBN 978-1-49830-409-2.
- Rogers, Tim (May 13, 2014). "Nicaragua seeks to de-dollarize economy". The Nicaragua Dispatch.
- Kane, D.R. (1988). Principles of International Finance. Croom Helm. p. 116. ISBN 9780709931348. Retrieved 2014-10-12.
- "Crawling Peg - Financial Glossary". glossary.reuters.com. Retrieved 2014-10-12.
- "Crawling Peg Definition | Investopedia". investopedia.com. Retrieved 2014-10-12.
- International Monetary Fund, Annual Report
- IMF, The Evolution of Exchange Rate Regimes Since 1990, see: PDF pp. 14-15