ADJUSTABLE PEG Meaning and
Definition
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An adjustable peg is a term used in economics and finance to describe a system in which a country's currency value is fixed or pegged to another currency or a basket of currencies, but with the option to periodically alter or adjust that fixed value.
In an adjustable peg system, the value of a country's currency is maintained within a particular range, determined by the central bank or monetary authority. The fixed value is typically set in relation to a reserve currency, such as the United States dollar, or a combination of multiple currencies. This fixed value serves as a reference point for the exchange rate of the country's currency.
The term "adjustable" in adjustable peg refers to the inherent flexibility of the system, allowing for periodic adjustments in response to changing economic conditions or other external factors. These adjustments are usually made through official actions, such as changing interest rates, buying or selling foreign currencies, or altering the ratio or weights of the basket of currencies to which the local currency is pegged.
The objective of an adjustable peg system is to provide stability to the country's currency and promote international trade by minimizing exchange rate fluctuations. However, maintaining the fixed value of the currency requires a strong level of foreign exchange reserves and competent management by the central bank. Failure to properly manage the adjustable peg system can lead to currency crises or speculative attacks, as seen in various historical instances.
Etymology of ADJUSTABLE PEG
The word "adjustable peg" is derived from its literal meaning. "Adjustable" refers to the ability to make changes or modifications, and "peg" refers to a fixed reference point or standard. This term is commonly used in the field of economics and finance to describe a system where the value of one currency is pegged or fixed to another currency, but with the ability to be adjusted or modified as needed.
