Explain the concept of currency pegging.

Currency pegging refers to the practice of fixing or maintaining the value of a country's currency in relation to another currency or a basket of currencies. This is typically done by a central bank or monetary authority, which sets a specific exchange rate for the domestic currency against the pegged currency. The pegged currency is usually a stable and widely accepted currency, such as the US dollar or the euro.

The purpose of currency pegging is to provide stability and predictability in international trade and investment by reducing exchange rate volatility. It can help to maintain price stability, control inflation, and promote economic growth. By pegging the currency, a country can ensure that its exports remain competitive and attract foreign investment.

However, currency pegging also has its drawbacks. It requires a country to maintain sufficient foreign exchange reserves to intervene in the foreign exchange market and defend the pegged exchange rate. This can limit the ability of the central bank to conduct independent monetary policy and respond to domestic economic conditions. Additionally, if the pegged currency experiences significant fluctuations or devalues, it can create economic imbalances and financial instability in the pegging country.

Overall, currency pegging is a policy tool used by countries to manage their exchange rates and stabilize their economies. It involves fixing the value of the domestic currency to a specific exchange rate against a chosen currency, aiming to provide stability and promote economic growth.