Authoritarian Rulers and Pegged currency

Pegged currency famously known as fixed exchange rate can be defined as a form of exchange regime whereby a state fixes the value of its currency against another currency or to a conglomeration of other currencies or to a measure of currency value i.e. Gold (Pike, Andres, & Tomaney, 2006). In the contemporary economies, a fixed exchange rate is meant to stabilize the currency value of a state against the currency pegged to it. This move often eases the trading and investments between the two economies whose currencies are pegged together. Also, pegged currency is used to control inflation. However, pegged currency curtails the government from employing monetary and fiscal policies to foster its domestic macroeconomic stability. Pegging of currency has a tendency of leading to a black market. An economy seeking to maintain a fixed rate of a pegged currency does so by passing legislations the trading of a currency at any different or other rate illegal. This therefore may encourage the brooding of black market in matters pertaining foreign currencies. However, there are economies that have been successful in using this method as monopolies oversee the conversion of all currencies. Emerging economies i.e. china employed this policy of pegging currency in the 1990s to contain the effects of the dollar (Umpleby, Medvedeva, & Oyler, 2004).

            Pegging currency is a curse to not only the third world economies but also to the emerging ones. An economy that has pegged its currency to that of another state is unable to trade in a good environment with other players using different currencies. This hampers trade and development of an economy. In addition, while utilizing a fixed exchange rate, a government is unable to employ monetary and fiscal policy in a free manner to check the levels of inflation. This exposes the government into trade deficits. The aforementioned is imminent because inflation and purchasing power are largely related. That is, the purchasing power of a rational individual increases relatively with an increase in inflation rates, this brings down the prices of imports. Cheap imports are catastrophic to the economic development and survival of an economy.  With cheap imports, developed economies dump their products in developing economies, this crushes domestic industries as exports prices will be relatively higher than imports. Collapse of domestic industries together with unfavorable terms of trade and unfavorable balance of payment are enough to bring an economy to its knees. In addition, the stubbornness of an authoritarian government will lead it to embrace deflationary measures when the economy is experiencing a deficit in trade. This will increase the unemployment rates and raise the cost of living of an economy.  From the above discussion, it is evident that the assertion that pegged currencies are associated with economic stability is only true to some extent, since attacks related to speculation are often directed towards pegged currency regimes i.e. emerging or third world regimes (Umpleby, Medvedeva, & Oyler, 2004).