Adjustable peg

An adjustable peg sits between a hard fix and a float. A monetary authority announces a central rate against an anchor currency or a basket of them, and a band either side of it within which the market rate is allowed to move. The rate is held there deliberately, and the authority keeps the option of moving the central rate later, which is the adjustable part of the name.

Holding the rate costs something. The authority defends the band by buying or selling its own currency out of reserves, by setting domestic interest rates in a way that supports the parity rather than the domestic cycle, and in some regimes by restricting capital flows. The consequence is that monetary policy is largely imported from the anchor: several Gulf currencies are held at a fixed rate against the US dollar, so rate decisions taken in the United States transmit into those economies almost directly. A realignment of the central rate is a policy act, and it is either announced or revealed when the defence stops.

The characteristic trap is that a pegged rate looks quiet until it is not. Measured volatility inside a band understates the risk in holding the currency, because the distribution of outcomes contains a jump that the historical record has not yet sampled. Economists also disagree about whether an adjustable peg is a regime in its own right or a fixed rate with an exit clause, and the International Monetary Fund classifies regimes by observed behaviour rather than by what an authority declares, so a currency's stated regime and its classified regime frequently differ.