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Crawling Peg

A crawling peg is an exchange rate regime which a currency is pegged to another currency, but is allowed to move within a price range, and this exchange rate range is slowly adjusted. It usually seen as a part of fixed exchange rate regimes which allows depreciation or appreciation in an exchange rate gradually. Some central banks use a formula which triggers a change when certain conditions are met (like need for adjustment for inflation), while others prefer not to use a preset formula and change exchange rate frequently to discourage speculations. For example, in the 1990s, Mexico had fixed its peso with the U.S. dollar. However, due to the significant inflation in Mexico, as compared to the U.S., it was evident that the peso would need to be severely devalued. Because a rapid devaluation would create instability, Mexico put into place a crawling peg exchange rate adjustment system, and the peso was slowly devalued toward a more appropriate exchange rate.



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