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What is Currency Pegging?
Currency pegging is fixing the exchange rate of a currencyby matching its value to the value of another singlecurrency or to a basket of other currencies, or to anothermeasure of value, such as gold or silver.
CHARACTERISTICS
Pegging is characterized by having a fixed exchange rate.
Stabilizing the value of a currency.
Timely or frequent Government intervention.
A country can have control of its currency by trading it inthe world exchange market
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HISTORYOF PEGGING1870 -1914 - There was a global fixed exchange rate.
1940 - Bretton Woods conference
Establishment of International Monetary Fund (IMF)
1970s - Major governments adopted a floating
system, and all attempts to move back to a global
peg were eventually abandoned in 1985
HISTORYOFINDIANRUPPEE
1898-1966 PEGGEDAGAINST POUND
1966-1971 PEGGEDAGAINSTUSDOLLAR
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EXCHANGE RATES
NOMINAL EXCHANGE RATE
REAL EXCHANGE RATE
BILATERAL EXCHANGE RATE
MULTILATERAL EXCHANGE RATE
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EXCHAN
GERAT
ER
EGIM
ES
Exchange rate regimesExchange rate regimes
FREE FLOATING EXCHANGE RATE
FIXED EXCHANGE RATE
CRAWLING PEGOR EXCHANGE RATE
MANAGED FLOATING EXCHANGE RATE REGIME
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Countries With Pegged Currency HaveUnsophisticated CapitalMarket And Weak
Regulating Institution
To Achieve Lower Inflation
StimulationOf Growth
Risk Free Trade
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Loss of IndependentMonetary Policy
Transmission of Shocks from the AnchorCountry
Speculative Attacks
Possibility of financial fragility
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1994- 2005. Chinese Yuan was pegged againstU.S. dollar. 1$ = 8.28 Yuan.
Currency not fully convertible in internationalmarket.
China has tight restriction and full control overcapital market.
China has moved from fix float to managed float.
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Not trying to promote export over import.
Abandoning the peg could lead to economiccrisis and damage export industry
MAIN REASONS FOR PEGGING
To capture the major global export market
Devaluating currency attracts foreign investorswhich strength foreign reserve.
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MAIN EFFECTS
U.S. wants Yuan to appreciate leading toreleasing pressure of debt.
Low domestic demand of US products andincrease in demand of Chinese products.
Impact on Exporters and Import-Competitors
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EFF
ECT:-A domestic imbalance between saving and
investment.
Americans save little, foreigners will use their
saving to finance profitable investmentopportunities in the U.S.; the trade deficit isthe result
The increase in U.S. imports (and hence, therisingU.S. trade deficit with China) is largelythe result of China becoming a productionplatform
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CHIN
A APPRECIATE RENM
IN
BI
U.S. STOP SELLING BONDS TO CHINA
CHINA SELLS USD INOPENMARKET
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The approach that can be taken is this thatChina should allow Yuan to appreciate slowlyotherwise it will lead to high inflation andrecession in US economy
US should stop providing subsidies and otherbenefits to US households but governmentshould try to increase the investment part in
the economy becauseUS economy consumesa lot and saves very less.
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