Hard Peg
| A hard peg is an exchange rate policy enforced by the government where it fixes its own country’s currency to that of another country. This policy is usually adopted by countries with weak currencies who want to stabilize their exchange rate. By pegging their currency to a stronger one, they can avoid large fluctuations in their currency’s value. There are a few disadvantages to having a hard peg. First, it can limit a country’s ability to pursue its own monetary policy. Second, if the country’s currency starts to weaken, the government may have to use its reserves to prop up the peg, which can deplete those reserves. Finally, a hard peg can make a country’s currency more vulnerable to speculative attacks. Despite these drawbacks, many countries still choose to peg their currency to another. The most common peg is to the U.S. dollar, but there are also a number of countries that peg to a basket of currencies. |
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