Crawling Peg

Crawling peg definition

Crawling peg exchange rate systems are a way of limiting shifts in the value of currencies by restricting movement in that value unless certain specific criteria are met; crawling pegs are usually adjusted frequently, but in small increments, so that there is no sudden devaluation of the currency in question. Essentially, a crawling peg is a fixed exchange rate tied or pegged to the value of another currency with provisions to prevent it from falling sharply in value in too short a time. Crawling peg systems are typically put in place by governments seeking protection for their currencies during times of serious economic upheaval or continual sharp devaluation of their currency. These systems are usually instituted in response to significant changes in the economic condition of the country and, by extension, the currency of that country; by preventing large swings in the value of the country’s currency, governments can reduce exchange rate volatility without enforcing an artificial fixed rate that cannot be adjusted as circumstances change.

Crawling peg case study

Hungary recently abandoned the crawling peg devaluation regime it had put in place in March 1995 This was intended to protect Hungary’s economy against the effects of runaway inflation; since its implementation, inflation has been slowed from the 30% level experienced when the crawling peg system was instituted to around 10%. Hungary’s rate of inflation has remained stagnant at about 10% since 2000, and the limitations on fiscal policy created by the crawling peg system became overly restrictive, actually preventing Hungary from acting to improve financial conditions within the country. While the crawling peg exchange rate regime was necessary at first, Hungary’s economic conditions have improved to a significant extent, and Hungary was able to return to a monetary system that conformed to the existing European Economic Union standards in 2005.