What Is Hard Peg?
Hard Peg is a type of currency exchange rate system in which the value of one currency is fixed to another. This means that the central bank or government sets an official exchange rate between two currencies and maintains it by intervening in the foreign exchange market when necessary. The most common example of this type of system is when a country pegs its own currency to the US dollar, meaning that 1 unit of their domestic currency will always be worth a certain amount (usually close) to 1 USD.
The main advantage of hard peg systems is that they provide stability for both countries involved as well as investors who are looking for reliable investments with minimal risk. It also helps reduce inflationary pressures since there’s less fluctuation in prices due to changes in exchange rates. However, these systems can be difficult to maintain over time because if one country experiences economic difficulties then it may not have enough reserves available to support its pegged rate against other currencies. Additionally, some economists argue that hard pegs limit economic growth potential since they prevent countries from taking advantage of beneficial fluctuations in global markets and devaluing their own currencies when needed.