Currency pegs are used by some countries to stabilize exchange rates from "summary" of International Financial Management, Abridged Edition by Jeff Madura
Countries may choose to use currency pegs as a means to stabilize exchange rates. A currency peg involves fixing the value of one currency in terms of another, or a basket of other currencies. This can help to maintain stability and predictability in the foreign exchange market. One common type of currency peg is a fixed exchange rate system, where a country's currency is pegged to another major currency, such as the US dollar. By pegging their currency to a more stable currency, countries can help to reduce volatility and uncertainty in their exchange rates. Another type of currency peg is a crawling peg, where the value of the currency is adjusted periodically in small increments. This allows the country to maintain stability while also allowing for some flexibility in response to changing economic conditions. Countries may also choose to use a pegged exchange rate as a way to control inflation. By fixing the value of their currency, countries can help to prevent rapid inflation that may occur with floating exchange rates. While currency pegs can be effective in stabilizing exchange rates, they are not without risks. If the pegged currency comes under pressure, countries may be forced to devalue their currency or abandon the peg altogether. This can have negative consequences for the economy and may lead to increased volatility in the foreign exchange market.- Currency pegs can be a useful tool for countries looking to stabilize their exchange rates and maintain economic stability. However, it is important for countries to carefully consider the risks and benefits of using a currency peg before implementing such a system.
