Question

Some developing countries have attempted to keep their exchange rates fixed against the U.S. dollar or other currencies, an action known as pegging. What are some advantages of pegging?

Answer 1

Pegging an exchange rate, where a government fixes its currency value against another, often provides stability, aids in managing inflation, simplifies international business, and can dissuade speculative attacks on the currency.

Step-by-step explanation:

The practice of pegging in the context of exchange rates is when a government intervenes in the foreign exchange market to set its currency's value relative to another currency, such as the U.S. dollar. The advantages of pegging are numerous. It can provide stability in exchange rates, which reduces the risk associated with international transactions, aiding in trade and investment from foreign entities by providing predictability. It can also help a country manage inflation by aligning its inflation rate with that of the country to which its currency is pegged, assuming the anchor currency is managed properly. Pegging can simplify decisions for businesses on international deals as there are fewer uncertainties related to exchange rate fluctuations. Finally, a pegged exchange rate can sometimes deter speculative attacks on a nation’s currency, as the commitment to maintain the peg can be seen as a sign of economic discipline.