In pegging, the government announces an “official” fixed exchange rate against a major trading currency. So, pegged exchange rates would require capital controls if monetary independence is desired. Pegged exchange rates have the main advantage of providing exchange rate stability for the home currency against the pegged currency. A third key problem is the incentive pegged exchange rates provide for a free ride by way of arbitraging. Absent the risk of the exchange rate changing, even small interest rate differentials would be profitable to arbitrage.

Source: The Edge Markets June 07, 2022 11:31 UTC