Crawling Peg in Chile

Definition

A crawling peg is an exchange rate system where a country's currency value is adjusted periodically at a set rate or in response to changes in economic indicators. In Chile, this mechanism was adopted to maintain competitiveness in the global market while addressing inflationary pressures, allowing for gradual adjustments that avoid abrupt shocks to the economy.

5 Must Know Facts For Your Next Test

1. The crawling peg system in Chile was implemented during the late 1970s and early 1980s as a response to hyperinflation and economic instability.
2. This system allows for small, pre-announced adjustments to the exchange rate, making it more predictable for businesses and investors.
3. Chile's crawling peg was designed to strike a balance between maintaining export competitiveness and controlling inflation.
4. Unlike a fixed exchange rate, a crawling peg provides flexibility, allowing the currency to adjust gradually to changes in economic conditions without causing major disruptions.
5. The use of a crawling peg has played a role in Chile's successful transition to a more open economy, supporting trade growth and foreign investment.

Review Questions

• How does a crawling peg differ from a fixed exchange rate system, particularly in the context of economic stability?
  • A crawling peg differs from a fixed exchange rate system primarily in its flexibility. While a fixed exchange rate maintains a constant currency value against another currency, a crawling peg allows for periodic adjustments. This gradual adjustment helps prevent abrupt shocks that could destabilize the economy, making it easier for countries like Chile to respond to inflationary pressures while promoting competitiveness in international markets.
• Discuss the impact of Chile's crawling peg on its inflation rates and export competitiveness since its implementation.
  • Chile's crawling peg has had significant impacts on its inflation rates and export competitiveness. By allowing controlled adjustments to the exchange rate, the system helps stabilize prices while keeping the currency competitive for exports. This balance has facilitated sustained economic growth, as it encourages investment and boosts exports without triggering severe inflation, creating a favorable environment for long-term economic development.
• Evaluate how the crawling peg system has contributed to Chile's overall economic growth and integration into the global market since the 1980s.
  • The crawling peg system has been crucial in Chile's economic growth and integration into the global market by providing a stable yet flexible exchange rate framework. It enabled Chile to control inflation while ensuring its currency remained competitive, attracting foreign investment and enhancing export growth. This approach facilitated Chile's transition into an open economy, leading to increased trade relationships and contributing to its reputation as one of Latin America's most stable economies.

Related terms

Exchange Rate: The price of one currency in terms of another, which can fluctuate based on supply and demand factors.

Inflation Targeting: A monetary policy strategy aimed at maintaining a specific inflation rate as a primary goal of economic policy.

Monetary Policy:

The process by which a central bank manages the money supply and interest rates to achieve macroeconomic objectives like controlling inflation and ensuring economic stability.