ABSTRACT
If a peg is to be maintained, it must a “hard peg,” meaning one that is certain to be maintained. A currency board where the rules are followed or full dollarazation (or euroization) are means of imposing such a “hard peg.” Another part of this lesson is that private businesses and government agencies must become less gullible, and pay little attention to promises to maintain a parity unless the evidence is overwhelming that it is a very hard peg; borrowing dollars, euros, or yen to finance local currency assets, without forward cover, is a quick route to bankruptcy unless the peg is as strong as the Rock of Gibralter. If the peg is that hard, however, local interest rates should be no higher than those prevailing abroad, making such foreign borrowing marginally profitable at best.
