The system is a method to fully use the key attributes of the fixed exchange regimes, as well as theflexibility of thefloating exchange rate regime. The system is shaped to peg at a certain value, but at the same time is designed to "glide" to respond to external market uncertainties.
To react to external pressure (such as interest rate differentials or changes inforeign-exchange reserves) to appreciate or depreciate theexchange rate, the system can have moderately-sized, frequent exchange rate changes to ensure that the economic dislocation is minimized.[1]
Somecentral banks use aformula that triggers a change when certain conditions are met, while others prefer not to use a preset formula and frequently change the exchange rate to discouragespeculations.
The main advantages of a crawling peg are that it avoids economic instability as a result of infrequent and discrete adjustments (fixed exchange rate),[1] and it minimizes the rate of uncertainty and volatility since the fluctuation in the exchange rate is kept minimal (floating exchange regime).[1]
For example,Mexico used a crawling peg to addressinflation in thepeso crisis. It transitioned from a fixed exchange rate in the 1990s without the instability of rapid devaluation.[2]
In practice, the system may not be an "ideal system" under certain scenarios. For instance, if there are substantial currency flows that may affect the exchange rate, monetary authorities may be "forced" to accelerate currency realignment, leading to substantial unsystematic costs to market players. In practice, only a few countries have adopted crawling pegs.[3]
E. Ray Canterbery proposes an idea of a delayed peg to eliminate many disadvantages of the crawling peg model. The delayed peg uses a wideband for exchange-rate fluctuations, while the band is allowed to move when foreign exchange liabilities accumulate (at a secret but predetermined rate).[4] In China, a new use of a "floating band" is essentially a delayed peg.[5]
According to the IMF's "Annual Report on Exchange Arrangements and Exchange Restrictions 2014",[6] only two countries—Nicaragua'scórdoba andBotswana'spula—had a crawling-peg exchange rate arrangement at the time.
China uses a floating band model, i.e., essentially a delayed peg.[6]
TheArgentine peso used, then abandoned, a crawling peg model between 1978 and 1981 namedLa Tablita. Also, a floating band model, which is essentially a delayed peg, was adopted between 2018 and 2019.[11][12] In December of 2023, two days after the assumption of presidentJavier Milei, a crawling peg model was implemented to devalue the Argentine peso at a fixed monthly rate of 2%—a rate that will be brought down to 1% in February of 2025 after inflation goals were achieved.[13][14]
TheBangladeshi taka has used a crawling peg to the US dollar since 8 May 2024.[15]
TheEcuadorian sucre had a crawling peg model until it was replaced with USD in March 2000.
TheUruguayan peso was on a crawling peg model (tablita) from 1973 until a banking crisis in 2002.
TheCosta Rican colón was on a crawling peg model until October 17, 2006.
