Crawling peg - Financial definition
Concise definition of the term crawling peg
A crawling peg is a type of fixed exchange rate mechanism where a currency's exchange rate is adjusted periodically, typically in small increments, to align more closely with market conditions. This system allows for gradual adjustments rather than abrupt changes, helping to maintain exchange rate stability while responding to economic indicators.
Comprehensive definition of the term crawling peg
The crawling peg system is a component of fixed exchange rate mechanisms designed to provide stability while allowing for gradual adjustments in response to economic indicators. Unlike a strict peg, which maintains a constant exchange rate, a crawling peg permits small, frequent adjustments to reflect inflation differentials or other economic factors.
For example, a country might adjust its currency's value by a fixed percentage every month to avoid sudden market shocks. This method is commonly used by developing countries to manage exchange rates while minimizing the risks of large-scale devaluations or speculative attacks. Countries like Brazil and Chile have employed crawling peg systems to maintain economic stability during periods of high inflation.