Crawling peg

Crawling peg is an exchange rate regime that allows depreciation or appreciation to happen gradually. It is usually seen as a part of a fixed exchange rate regime.

The system is a method to fully use the key under the fixed exchange regimes as well as the flexibility under the floating exchange rate regime. The system is shaped to peg at a certain value but at the same time is designed to “glide” to respond to external market uncertainties.

To react to external pressure (such as interest rate differentials or changes in foreign-exchange reserves) to appreciate or depreciate the exchange rate, the system can have moderately-sized, frequent exchange rate changes to ensure that the economic dislocation is minimized.

Some central banks use a formula that triggers a change when certain conditions are met, while others prefer not to use a preset formula and frequently change the exchange rate to discourage speculations.

The main advantages of a crawling peg are:

For example, Mexico used a crawling peg to address inflation in the peso crisis, transitioning from a fixed exchange rate in the 1990s without the instability of rapid devaluation.

In practice, the system may not be an "ideal system" under certain scenarios. For instance, if there is substantial currency flows that may affect the exchange rate, monetary authorities may be "forced" to accelerate currency realignment, leading to substantial unsystematic costs to market players. In practice, only a few countries have adopted crawling pegs.

E. Ray Canterbery proposes an idea of a delayed peg to eliminate many disadvantages of the crawling peg model. The delayed peg uses a wide band for exchange-rate fluctuations, while the band is allowed to move when foreign exchange liabilities accumulate (at a secret but predetermined rate). In China a new use of a "floating band" is essentially a delayed peg.

According to the IMF's "Annual Report on Exchange Arrangements and Exchange Restrictions 2014", only two countries—Nicaragua's córdoba and Botswana's pula—had a crawling-peg exchange rate arrangement at the time.

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Wikipedia