Pegged Exchange Rates
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Pegged exchange rates are exchange rates that are set by a country pegging its currency to another country's currency or asset like gold. Central banks maintain pegged rates by buying or selling their currency on the open market to influence supply and demand dynamics and keep the currency value near the pegged rate. Pegged rates provide stability but require large foreign currency reserves and can restrict government policies.
Pegged Exchange Rates
- 2. 1. Meaning 2. How are Pegged Exchange Rates Maintained? 3. Advantages 4. Disadvantages 5. Reference Content
- 3. Pegged Exchange Rates are exchange rates that are set by way of “pegging” of one’s currency with another country’s currency or some other valuable measure, such as gold. The supreme monetary authority of a country or the Central bank takes care of this task. Pegging is done to maintain stability in the exchange rates and avoid any major fluctuations in the currency’s value. Meaning
- 4. Maintaining the value of a currency according to the pegged exchange rates is the duty of the Central bank of the country. It has to buy or sell its currency by using the open market mechanism as the situation demands. The Central bank starts buying foreign currency and adding to its reserves. This results in an overflow of domestic currency supply in the country. Excess supply results in a reduction in its value, thereby again bringing the equilibrium in foreign exchange rates. How are Pegged Exchange Rates Maintained?
- 5. The following are the advantages of pegged exchange rates: • Increase in profitability of small exporting countries • Stability and increase in reliability • Increase in government discipline Advantages
- 6. Disadvantages of pegged exchange rates are: • Huge foreign exchange reserve • High inflation or deflation • Rigidity in government policies Disadvantages
- 7. Reference To know more about it, click on the link given below: https://efinancemanagement.com/international-financial-management/pegged-exchange-rate