In macroeconomics, crawling peg is an

exchange rate regime An exchange rate regime is a way a monetary authority of a country or currency union manages the currency about other currencies and the foreign exchange market. It is closely related to monetary policy and the two are generally dependent on many ...

that allows depreciation or appreciation to happen gradually. It is usually seen as a part of a

fixed exchange rate A fixed exchange rate, often called a pegged exchange rate, is a type of exchange rate regime in which a currency's value is fixed or pegged by a monetary authority against the value of another currency, a basket of other currencies, or another ...

regime. The system is a method to fully use the key attributes of the fixed exchange regimes as well as the

flexibility Stiffness is the extent to which an object resists deformation in response to an applied force. The complementary concept is flexibility or pliability: the more flexible an object is, the less stiff it is. Calculations The stiffness, k, of a bo ...

of 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.

Changing rates

External pressure

To react to external pressure (such as interest rate differentials or changes in

foreign-exchange reserves Foreign exchange reserves (also called forex reserves or FX reserves) are cash and other reserve assets such as gold held by a central bank or other monetary authority that are primarily available to balance payments of the country, influence ...

) 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.

Rate formulae

Some

central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central b ...

s 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.

Advantages and disadvantages

The main advantages of a crawling peg are that it avoids economic instability as a result of infrequent and discrete adjustments (fixed exchange rate) and it minimizes the rate of uncertainty and volatility since the fluctuation in the exchange rate is kept minimal (floating exchange regime). For example,

Mexico Mexico (Spanish: México), officially the United Mexican States, is a country in the southern portion of North America. It is bordered to the north by the United States; to the south and west by the Pacific Ocean; to the southeast by Guatema ...

used a crawling peg to address

inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...

in the

peso crisis The Mexican peso crisis was a currency crisis sparked by the Mexican government's sudden devaluation of the peso against the U.S. dollar in December 1994, which became one of the first international financial crises ignited by capital flight ...

. It transitioned 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 are 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.

Delayed peg

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.Gang Yi, The People's Bank of China, "Exchange Rate Arrangement: Flexible and Fixed Exchange Rate Debate Revisited, IMF, April 16–17, 2013, pp. 5-6.

Economies using crawling peg

According to the IMF's "Annual Report on Exchange Arrangements and Exchange Restrictions 2014", only two countries—

Nicaragua Nicaragua (; ), officially the Republic of Nicaragua (), is the largest country in Central America, bordered by Honduras to the north, the Caribbean to the east, Costa Rica to the south, and the Pacific Ocean to the west. Managua is the countr ...

's córdoba and

Botswana Botswana (, ), officially the Republic of Botswana ( tn, Lefatshe la Botswana, label= Setswana, ), is a landlocked country in Southern Africa. Botswana is topographically flat, with approximately 70 percent of its territory being the Kalaha ...

's pula—had a crawling-peg exchange rate arrangement at the time. * China uses a floating band model, that is essentially a delayed peg * The Nicaraguan córdoba has used a crawling peg since 1991. * The

economy of Botswana The economy of Botswana is currently one of the world's fastest growing economies, averaging about 5% per annum over the past decade. Growth in private sector employment averaged about 10% per annum during the first 30 years of the country's inde ...

used a floating peg model until 2005. * The

economy of Vietnam The economy of Vietnam is a mixed socialist-oriented market economy, which is the 38th-largest in the world as measured by nominal gross domestic product (GDP) and 26th-largest in the world as measured by purchasing power parity (PPP) in 2022. ...

uses a crawling peg model as of June 28, 2013. * The

economy of Argentina The economy of Argentina is the second-largest national economy in South America, behind Brazil. Argentina is a developing country with a highly literate population, an export-oriented agricultural sector, and a diversified industrial base. ...

used, then abandoned a crawling peg model between 1978 and 1981 named ''tablita''. Also used a floating band model, that is essentially a delayed peg, between 2018 and 2019. * The

Ecuadorian sucre The Sucre () was the currency of Ecuador between 1884 and 2000. Its ISO code was ECS and it was subdivided into 10 ''decimos'' and 100 '' centavos''. The sucre was named after Latin American political leader Antonio José de Sucre. The currency ...

had a crawling peg model until it was replaced with USD in March 2000. * The

Uruguayan peso Uruguayan peso ( es, peso uruguayo) has been a name of the Uruguayan currency since Uruguay's settlement by Europeans. The present currency, the ''peso uruguayo'' (ISO 4217 code: ) was adopted in 1993 and is subdivided into 100 '' centésimos' ...

was on a crawling peg model (''tablita'') from 1973 until a banking crisis in 2002. * The

Costa Rican colón The colón (plural: ''colones''; sign: ₡; code: CRC) is the currency of Costa Rica. It was named after Christopher Columbus, known as ''Cristóbal Colón'' in Spanish. A colón is divided into one hundred céntimos. Symbol The symbol for ...

was on a crawling peg model until October 17, 2006.

References

External links

* * *{{cite web, url=http://www.investopedia.com/terms/c/crawlingpeg.asp, title=Crawling Peg Definition | Investopedia, publisher=investopedia.com, accessdate=2014-10-12
International Monetary Fund, Annual Report

IMF, The Evolution of Exchange Rate Regimes Since 1990, see: PDF pp. 14-15
Foreign exchange market