Background
An adjustable peg is an exchange rate system where countries stabilize their currency’s exchange rate around a set value, known as the “peg,” but retain the flexibility to adjust this value when necessary. This system contrasts with both fixed exchange rates, which do not allow for adjustments, and floating exchange rates, which have no set value.
Historical Context
The adjustable peg system is most notably associated with the Bretton Woods Agreement, which was established in 1944 and lasted until the early 1970s. Under the Bretton Woods system, major currencies were pegged to the U.S. dollar, which was in turn pegged to gold. This system provided a middle ground between complete rigidity and total flexibility in exchange rates.
Definitions and Concepts
- Peg: The set exchange rate value that a currency seeks to maintain.
- Par Value: The official value of a currency in terms of another currency or a standard like gold.
- Foreign Exchange Market Intervention: Actions taken by a country’s central bank to buy or sell its own currency to maintain the peg.
- Speculation: The act of trading in anticipation of a change in the value of the currency peg.
Major Analytical Frameworks
Classical Economics
Focuses on factors related to supply, demand, and market equilibrium, which indirectly influence exchange rates.
Neoclassical Economics
Emphasizes the role of rational expectations and market efficiencies, viewing currency pegs as potentially vulnerable to speculative attacks.
Keynesian Economics
Concentrates on the adaptability of monetary policies to stabilize output and employment, underscoring why an adjustable peg can be operative within government intervention frameworks.
Marxian Economics
Explores the fundamental dynamics of capital and power, questioning how state interventions serve market mechanisms under systems like the adjustable peg.
Institutional Economics
Looks at the role of institutions, emphasizing the governance structures like the Bretton Woods institutions in facilitating manageable and adjustable pegs.
Behavioral Economics
Examines the role of psychological factors influencing traders’ expectations and behaviors, affecting the stability and perception of the peg system.
Post-Keynesian Economics
Advocates for the flexibility in adjusting pegs to address economic disparities, particularly for developing economies.
Austrian Economics
Critically views currency interventions and fixed exchange systems, emphasizing free-market mechanisms over managed exchange rates.
Development Economics
Analyzes the appropriateness of adjustable pegs for developing countries, considering balance of payments, currency stability, and economic growth.
Monetarism
Underlines the importance of controlling money supply, viewing central bank interventions to defend a peg as potentially counteractive to monetary control.
Comparative Analysis
Adjustable pegs offer a compromise between fixed and floating exchange rate systems. While they provide the stability required for trade and investments, their underlying flexibility aims to alleviate mounting economic pressures and speculative attacks.
Case Studies
Two notable historical contexts include the Bretton Woods system and various instances across the developing world where countries have implemented adjustable pegs to manage currency stability amidst fluctuating economic conditions.
Suggested Books for Further Studies
- “The Pragmatic Approach to Banking Regulation” - Detailing the Bretton Woods system and surrounding economic policies.
- “Monetary Dynamics Under Bretton Woods” - Discussing theoretical foundations and empirical evidence surrounding adjustable pegs.
Related Terms with Definitions
- Bretton Woods System: The post-World War II framework for international monetary policy that established fixed but adjustable exchange rates.
- Speculation: Trading on the expectation of future changes in an asset’s price, including currencies.
- Exchange Rate Parity: Another term for the pegging of a currency at a certain value against another currency or standard.
- Foreign Exchange Market: The global marketplace for buying and selling national currencies.
