Adjustable Peg:
An adjustable peg is a monetary system in which a country’s currency is pegged to another currency or a basket of currencies, with the exchange rate being allowed to fluctuate within a certain range. This system is typically used to stabilize a country’s currency and maintain its value relative to other currencies. The central bank or monetary authority of the country will intervene in the foreign exchange market to buy or sell its currency in order to maintain the desired exchange rate. The adjustable peg system allows for some flexibility in the exchange rate, but within predetermined limits, to prevent excessive volatility and maintain stability in international trade and financial transactions.
The adjustable peg is a monetary system in which a country’s currency is fixed to a specific value relative to another currency or a basket of currencies. This system allows for the exchange rate to be adjusted periodically in response to economic conditions.
Under an adjustable peg system, a central bank or monetary authority is responsible for maintaining the fixed exchange rate by buying or selling its currency in the foreign exchange market. This intervention helps to stabilize the currency’s value and promote economic stability.
The adjustable peg system was widely used during the mid-20th century, particularly after the Bretton Woods Agreement in 1944. The agreement established the U.S. dollar as the international reserve currency, with other currencies pegged to it. However, the system faced challenges and eventually collapsed in the early 1970s due to economic imbalances and speculative attacks on currencies.
In summary, the adjustable peg is a monetary system that fixes a country’s currency to another currency or a basket of currencies. It allows for periodic adjustments to the exchange rate to maintain stability. Although widely used in the past, the system faced challenges and eventually collapsed.
Q: What is an adjustable peg?
A: An adjustable peg is a monetary system in which a country’s currency is pegged to another currency or a basket of currencies, but the exchange rate can be adjusted periodically.
Q: How does an adjustable peg work?
A: In an adjustable peg system, the central bank of a country sets a fixed exchange rate for its currency in relation to another currency or a basket of currencies. However, if the fixed exchange rate becomes unsustainable or if economic conditions change, the central bank can adjust the exchange rate to maintain stability.
Q: What are the advantages of an adjustable peg system?
A: 1. Stability: An adjustable peg system can provide stability in international trade by reducing exchange rate fluctuations.
2. Control: It allows the central bank to have some control over the exchange rate, which can be useful in managing inflation and promoting economic growth.
3. Confidence: A fixed exchange rate can instill confidence in foreign investors and encourage capital inflows.
Q: What are the disadvantages of an adjustable peg system?
A: 1. Loss of autonomy: Countries using an adjustable peg system may have limited control over their monetary policy as they need to align with the pegged currency.
2. Speculation: Speculators can take advantage of the fixed exchange rate by betting on potential adjustments, leading to currency crises.
3. Economic imbalances: If the pegged currency experiences significant fluctuations or economic shocks, it can create imbalances in the pegged country’s economy.
Q: Can an adjustable peg system be abandoned?
A: Yes, countries can choose to abandon an adjustable peg system if it becomes unsustainable or if they believe it is no longer serving their economic interests. This can be done by allowing the currency to float freely or by adopting a different exchange rate regime.
Q: What are some examples of adjustable peg systems?
A: The Bretton Woods system, which operated from 1944 to 1971, is a well-known example of an adjustable peg system. The Chinese yuan’s exchange rate is also managed through an adjustable peg system, although it has been gradually moving towards a more flexible exchange rate regime in recent years.
Q: How does an adjustable peg system differ from a fixed exchange rate system?
A: In a fixed exchange rate system, the exchange rate is set and maintained at a fixed level without any adjustments. On the other hand, an adjustable peg system allows for periodic adjustments to the exchange rate to maintain stability.
Q: What is
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This glossary post was last updated: 29th March 2024.
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