Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
... I disagree that a traffic circle should be called a traffic circle, because of all the openings in the circumference ... I think it should be called a traffic celtic cross ...

... but a peg is an immediate target in trading in some other currency. You can obviously walk the peg in order to target some other objective - including in order to maintain a stable exchange rate in another currency - so a currency peg can easily show up as a moving exchange rate.

What doesn't happen with a peg, if it is performed competently, is a lot of volatility in the exchange rate. A relatively stable exchange rate with a lot of "noise" along the way would be an indication that something other than direct pegging to maintain that exchange rate is taking place.

Mainstream economists, of course, get sloppy about it, since they can ignore the differences that make a difference with absurd assumptions about expectations and information - witness the neutrality of money assumption for an especially obviously absurd assumption completely unanchored in reality which is nevertheless the "normal" assumption to make.

However, when considering open money in the real world, you have to distinguish between the currency whose exchange rate you are targeting by buying and selling that currency, and the exchange rate management targets that you have.

We all assume that there is a substantial weighting of dollars in the composite currency peg that the Chinese in fact use, but the volatility in the exchange rate that you have shown suggests that there may not be as heavy a weighting as we have been assuming.

That is, what would you see if country A was pegging with currency B while trying to keep A:C exchange rates steady? In a period that B:C was moving rapidly, the peg would be reset frequently ... possibly daily, certainly once a week or more ... between each reset, the A:C exchange rate would move like the B:C exchange rate, and with each reset the A:C exchange rate would jump back toward the target A:C rate.

To infer which currency or currencies dominates the composite peg, you'd look for a currency or mix of currencies that show a rapid change in B:C exchange rates when there is a lot of volatility in the A:C rate, and slow change in B:C exchange rates when there is less volatility in the A:C rate.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Nov 7th, 2009 at 05:23:45 PM EST
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