THERESA ANTHONY ROLL NO.

: 47

WHAT IS PEGGING?
Pegging is a method of fixing a country's currency to stay at a certain rate below or above another country's currency. Pegging is characterized by having a fixed exchange rate. When a country pegs their money to a commodity - gold, silver, uranium - The value of the currency would then be in direct proportion to the value of the commodity.

 A country can have control of its currency by

trading it in the world exchange market: if the exchange rate is too low, they can sell some of their currency; if the exchange rate is too high, then exports are reduced and the likely result is a recession; this is happening in South East Asia.
Currency Pegging is also called as the Fixed

Exchange Rate.
In simple words, currency pegging is a concept

of fixing the standard rate of one currency against the another or group of currencies.

Definition
A method of stabilizing a country's currency by fixing

its exchange rate to that of another country.

A practice of and investor buying large amounts of an

underlying commodity or security close to the expiry date of a derivative held by the investor. This is done to encourage a favorable

Objective
To discuss the meaning, efficacy

and ramification of having a fixed exchange rates system and a floating exchange rate system

EMERGENCE OF CURRENCY PEGGING

1870- 1914 1960 1971
1973 1975 1970 1990 1997- 1998

: Fixed exchange rate system : US inflation rates : Increased inflation rates led the Brettonwoods system to suspend : Developing countries continued to peg their exchange rates : 87% of the developing countries had a Pegged Exchange Rate system : Shifting from Single Currency Peg to Basket of Currencies Peg : Only 45% of the developing countries had Pegging System : Due to Asian Crisis, many countries had abandoned their peg system and adopted Floating Rate System

Features
It is also known as fixed interest rate. Accompanied by a corresponding monetary policy

through open market operations. If there is too much of it circulating, the law of supply and demand dictates the value of the currency will decline .
If the supply is too small, the country puts new money into

circulation by buying the reserve currency.

Functions
To facilitate international trade and foster economic

growth. Fluctuations in currency has either a cost or benefit of doing business

E.g.: Selling products in a currency that is gaining

value increases profits when converted back into the domestic currency.

Types of pegging
Float :

A floating exchange rate or fluctuating exchange rate is a type of exchange rate where in a currency's value is allowed to fluctuate according to the foreign exchange market. A currency that uses a floating exchange rate is known as a floating currency.

Pegged float: Pegged floating currencies are pegged to some band or value, either fixed or periodically adjusted.

Contd.
Fixed:

A fixed exchange-rate system is a currency system in which governments try to keep the value of their currencies constant against one another. Currency board: A currency board is a monetary authority which is required to maintain a fixed exchange rate with a foreign currency.

Contd.
Dollarization:

Dollarization occurs when the inhabitants of a country use foreign currency in parallel to or instead of the domestic currency. The term is not only applied to usage of the United States dollar, but generally to the use of any foreign currency as the national currency.

Significance
Currency pegs are usually undertaken by small

countries and those whose economies are based on exports.

Eg: The dollar became the world's reserve currency after WWII because represented the largest physical gold reserves.

Benefits
Fosters stability
Better market value Easy conversion

Investment opportunities

CONCLUSION
Pegging a currency can work to produce

conducive trading environments and fiscal stability respective to world markets but it does have a sinister side if over done.

There are a few difficulties that can be

attributed to floating a currency but ultimately these are far outweighed by the strength and stature a currency attains from the equilibrium attained by floating in the international market.