Pros and cons of a currency peg
Pros of a currency peg
One of the biggest advantages of a currency peg is that it creates a win-win situation between countries that are within the currency peg. One country will pay less for goods and production, while the other country will make more profit. This is because the conversion rate between the two currencies is more favourable for both parties.
A currency peg also keeps the value of the currency low, supporting economic growth by inviting countries with more mature economies to invest. Lastly, because pegged currencies lower volatility, it reduces the risk of a currency crisis.
Cons of a currency peg
Maintaining a currency peg requires a central bank to monitor the supply and demand of each currency to ensure that there are no surprising spikes in either.
When the actual value of a currency no longer reflects the pegged price that it is trading at, problems arise for central banks, who have to work hard against excessive buying or selling of their currency. They’d do so by holding large volumes of foreign currency. And, the more reserves the bank has to maintain, the higher the inflation rate of the country.