Understanding the concept of a currency peg

Seminar paper from the year 2019 in the subject Economics - Monetary theory and policy, grade: 1,3, The FOM University of Applied Sciences, Hamburg, course: International Economic Policy, language: English, abstract: In this work an understanding for fixed exchange rates shall be developed, in order to be able to apply it in relation to flexible ones. Currency policy is often viewed in connection with monetary policy, and is a complex topic with many different approaches to determine the exchange rate; as it is a relative and not absolute price. In recent years exchange rates have played an increasing part in financial crises. In 1923 a change in the dominant exchange system - the gold standard - occurred; from this time there were two exchange rate systems - fixed and flexible. Since then there has been an ongoing discussion as to whether fixed exchange rate systems are the better way of reaching countries' economic goals. A crisis can be also a starting point to think about the pros and cons of the relevant exchange rate system and if it was a cause as well. This work tries to find an answer to the fundamentals of currency peg from looking at the history to better predict the future, finding some ideas as to what should be considered in determining the exchange rate system. The subject of this work is the fixed exchange rate system and will focus only on the technical aspect of the exchange rate and not the influences to which politicians are exposed. The aim of this work is to obtain an overview regarding whether a currency peg is good or bad for a country, through taking a short look on the Mexican crises to find the main trend, namely if a fixed or flexible exchange rate is better. To answer the question, exchange rate systems will firstly be defined and the different types and countries using it will be described. Then the history, the gold standard, and the mechanism of fixed exchange rate systems and development of crises will be considered. Chapter three will look at the advantages and disadvantages of a currency peg including a brief examination on the Mexican crises as defined by the literature. In the final chapter a conclusion will be reached whether a currency peg is a favourable system.