Please explain the implications of a currency peg.

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I would like to understand the implications of a currency peg for the country with their currency pegged to an external currency.
I know WHAT a currency peg is, but I don't understand the broader implications of same.

what are the effects on importers?, exporters?, trade deficits/surpluses?, GDP?, inflation?, foreign investment?, domestic investment?, etc...

a number of countries peg to USD~~~what happens if the USD is devalued? currency wars?severe inflation?

Thanks in advance.

My guess is that its about stability.

Poor destitute countries peg their currency to hard currencies because if left un pegged their own currencies would go wildly up and down- which would scare off foreign investment because of too much uncertainty. Stability attracts foriegn investment.

If the US dollar goes up a little in value it hurts American exports a little, and it would also hurt the exports of Lower Slobbovia a little because its currency is pegged to ours. But that little of bit of vagary is fine with the Lower Slobbovians because if left unpegged it would more unpredictably crazy.

Last edited by naturalplastic on 05 May 2014, 7:41 pm, edited 1 time in total.

I'm curious about fixed versus floating exchange rates in general, but unfortunately I don't know much yet. I'll definitely watch this thread.

I don't know, but you've motivated me to look it up.

I studied it in school but don't remember enough to comment. But thanks for raising an intelligent question about economics.

A word of caution about researching topics like this: I have noticed that political hacks and even some economists like to take topics like this and "explain" them in such a way as to support or refute their preferred political views. To the extent such a thing is possible, I like to seek out more mainstream (and hopefully less biased) purely academic sources.

Largely nothing. If any nation is watching what's going on in the world's economy, long before the USD plummets to the bottom, they will start moving away from the USD to some other stable currency.

Arguably, this has already started, and as more and more nations reject the USD as a global reserve currency, it only hastens the collapse of the USD.

That's why the state of the US economy is so critical to people in the USA. If it falters too much, our currency will be abandoned as a global reserve currency, and right now, that's the only thing keeping the machine going in our country.

What is it that makes the dollar a stronger choice than the Euro, or the Yen, or Sterling?

Many currencies are pegged to a basked of other currencies, instead of just dollar or euro. The Chinese renminbi works that way. China has been criticised for keeping their currenty too low, boosting their exports but leaving their citizens poorer than they otherwise would have been, and causing a trade deficit for coutries such as the US.

All three (euro, yen, dollar) are examples of "hard currency". I dont know which is the hardest at the moment.

My guess is that a 'hard currency' is one that is stable. And stable because its issued by stable, powerful, rich country. The currencies follow the fortunes of the nation that issues them.

The British Pound was the hardest currency until the end of the First World War. Its been descending ever since.

The US dollar was the strongest in the post world war two era because the USA was first the ONLY economy to survive the war, and then remained the biggest economy. But the dollar has been rivaled by the Mark and the Japanese Yen since the Seventies. The Yen and dollar were still dukeing it out when the Euro appeared in the 21st centurey to challenge both.

I have no idea who I would peg my currency to right now. The deadlock in congress over the debt ceiling, and the govt. loosing its high credit score probably does not help the dollar. But Im just guessing.

Thats a good thing-that our dollar is crapping out. That way we can sell our exports easier. We will make more money and get more jobs. We just wont be able to buy anything with our money. But then our dollar will get stronger. And we WILL be able to buy stuff. But we will all loose our jobs because we wont be able to sell anything!

Lol!

China is criticized for pegging their currency, however , ironically, it is the U.S. that benefits from the arrangement in the short term. The U.S. prints up pieces of paper called "Treasuries", and sends them to China, and China sends us real stuff. We give them worthless Treasury IOUs, and they give us physical goods. (Search youtube "Warren Buffet tiny pieces of paper" and he echos the same thinking)

Some predict that this arrangement will end badly for America. However, the U.S. has the most powerful military. Americans may embrace 'might makes right' like Tony Soprano ....

Last edited by LoveNotHate on 06 May 2014, 5:18 pm, edited 2 times in total.

from prior post ...

The U.S. is the "Tony Soprano" of the world.

Tony shows up at your business, and "asks" (coerces) you to become a partner his scheme.

Tony takes advantage of this "partnership" by borrowing against the equity, draining your equity, and disregarding your interests.

When nothing further can be extracted, then Tony burns down your business to collect insurance on it.

When you complain, Tony first replies with the 'Scorpion's rationalization' of "its my nature".

When you further complain, a more agitated Tony makes clear to you the moral code of 'might makes right' - by asking, "What are you going to do about it ?"

I would also speculate that they are "hard" currencies because they (originally) were backed by actual wealth (silver and gold reserves held by the nation). Any country can create a currency and give it a value, but if it can't be redeemed for something they hold that is of fairly universal value, it's not "hard" but "soft" currency.

Going to fiat currencies (global) should mean that nobody has a "hard" currency anymore, but in the end, the strongest currency is one that can be redeemed on demand without bankrupting the nation issuing it.