I’m currently in Belize, where the local currency (the Belize Dollar) is “pegged” to the US dollar, with 1 Belize Dollar always being worth $0.50 USD. I also heard that the Guatemalan Quetzal was pegged to the dollar in the 20th century, but isn’t any more.
How does this work? Does this mean that Belize Dollars are functionally US dollars in the global economy? And there must be implications for how much money a pegged country could print without losing its value…I could use an overview!
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In an open market the Belize dollar might trade for more, or for less, than the US halfdollar.
So in order to peg the Belize dollar, some extraordinary market agent needs to sell and buy Belize dollar for 0.5 US dollar. To maintain the sell order the market agent needs a huge Belize printing press (which is easy for state).
That agent also needs buy Belize dollar for 0.5 US dollar. The agent cannot print US dollars. He needs a US dollar reserve for every Belize dollar printed before.
Now the issue is another level of indirection over the state agent (e.g. trust). The state can simply drop self or buy orders, or adjust ratio at will (e.g. cause the US dollar reserve isn’t as big as it should be; or gambled away).
It means they keep the valuation at exactly one half dollar,so it goes up and down in value with the dollar.Doesn’t mean other countries will trade in it.BTW ,asking about”pegging” on Reddit is,,,risky!🙈
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To bind a currency A to another currency B at a fixed exchange rate R, the state bank just promises to always change currency A to the rate R into B.
There is no need to have the amount of currency B in some way on stock.
As any currency thing, it is based on trust into the currency system.
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