The crawling peg system is a method of compromising or adjusting the value of currency between fixed currency exchange rate and fluctuating or floating currency exchange rate. The government implements the crawling peg system in order to stabilize transactions across the globe considering important factors such as inflation rate, market demand of currency, and the like.
Objectives or purpose of crawling peg system
Many economies or governments implement chronic peg systems in order to stabilize economic activities across the globe or beyond the boundaries of the nation. Following are some of the key objectives of crawling big systems.
Economic Adjustment
The crawling peg system involved in adjustment of currency value between fixed and wetting in order to avoid any negative impact on the economic activities across the boundaries of the nation. This economic adjustment is achieved by implementing the compromise of currency value within a specific range considering all the economic indicators such as the inflation rate, the demand for currency in the market, and the impact of sudden changes in currency on the market or economy.
Example
Consider the crawling pics system implemented between two currencies one is the Indian currency rupee and another is the British currency it is pound. The country’s central bank establishes the adjustment band or range of 2%. That means the Exchange rate between these two economies under this band is allowed to fluctuate between Rs. 98 to Rs. 102 per 1 GBP.
Periodic adjustments
Economy faces the economic pressure or inflation pressure then it appreciates the currency fluctuation by implementing or appreciating the currency value gradually. The application of currency value by crawling big system done considering the economic indicators such as inflation rate market demand etc.
If economy faces the problem of deflation then the central bank depreciates the currency fluctuation or value by implementing a crawling peg system The small change in deciding the currency rate fluctuation band or range
Above both the cases either inflation or in deflation the country always studies and predicts the impact of adjustment currency rate value on various economic factors. It decides the changes either appreciate or depreciate the currency value on the basis of economic indicators such as inflation rate and market demand impact on the economic factors.
Inflation control
Implication inflation is controlled by the Central Bank of any country by implementing the financial instruments repo rate, reverse repo rate, statutory liquidity ratio, and bank rate. To control the implication it can also be possible to ablate the crawling peg system.
Crawling pe system Adjust or set band or range for currency value fluctuations between two currencies. Using this fluctuation band the importers or exporters or any transaction between two countries can be made stable from the perspective of inflation. The importers can purchase the goods at a price that can be predicted and which can be under the control through which the implication can be controlled up to some extent.
The price of imported goods can be more than the normal price expected by the market. This unexpected or unpredicted increase in the price of imported goods can be controlled by a crawling peg system fluctuation band or range of currency value between two economies.
Competitiveness
Any economy can increase its value of exporting by making or implementing a crawling peg system through which it can depreciate the currency value and increase the price of exporting goods. This can enhance the price competitiveness of their goods and services going to be exported to the outside market. The competitiveness of any economy can be responsible for increasing the national income and increasing trade across the boundaries of the nations.
Adaptability to the economic condition
The crawling peg system enables any economy to adopt favorable monetary policies and various economic policies of the nation. Monetary policies or economic policies play an important role in the growth of the economy of any nation. Stop crawling pig system enable the economy to adjust the currency value in a certain range of band. This adjustment of the value of currency Rate fluctuation allows the country to enhance trade across the boundaries by calculated risk and increases.
Countries can adopt economic policies according to the changes in external environments. Crawling peg system can reduce the risk of fluctuating the value of quality beyond the expected range. This expected range can be made possible by implementing crawling peg system.
Policy autonomy
Any country expects its monetary policy Should be according to its economic requirements. The crawling peg system enables the country or Central Bank of the country to establish monetary policies that are in accordance with their economic requirement.
A country’s central bank can have autonomy in monetary policy by predicting the expected changes in the currency rate fluctuation. The crawling peg system can act as a shock observer to any economy by adjusting the currency rate fluctuation.
To prevent the speculative attack
Appreciation in the Currency exchange rate can be unpredictable and if it is more than expected then the agent can take the benefit of running the trade in use to get the benefit of high fluctuation. This speculative attack made by the agents has the worst impact on the economy.
Crawling peg system can avoid this speculative attack by establishing the exchange rate fluctuation range and making aware of the businesses involved in international trade. The crawling peg system helps any trade beyond the national boundaries with calculated risk. The risk reduction can be made possible up to a certain extent by means of this crawling peg system.
Maintain the equilibrium in external accounts
crawling peg system helps the economy to avoid the trade in balances by achieving certainty in the external balance. crawling peg system Provides an instrument to execute the trade across boundaries with certainty and stability.
Adjustments in the fluctuation of exchange rates can allow the economy to maintain the external balances in the expected range in accordance with the economic requirement. Outside economic situations can be unpredictable and can be beyond the expected range. The predictability or certainty can be achieved by implementing crawling peg system.
The effectiveness of the crawling peg system depends upon various factors such as the economic condition of any country, the economic policy implemented by E country, the Global economic environment that is beyond the control of the country, etc. It is also been noted that it is very difficult to decide or determine the fluctuation band or range that can be favorable for the country’s economy. All the exchange rate regimes of the country can be effective only when they can be implemented in accordance with the economic requirement and are favourable for all.