An Investigation into the Pegged Exchange Rate System: GCC Countries

This report examines the pegged exchange rate system, focusing on its advantages and disadvantages within the context of GCC countries. It highlights the benefits, such as the elimination of exchange rate fluctuations, which promotes international trade and attracts foreign investment, leading to economic stability. However, the report also discusses the limitations of this system, particularly its inflexibility in a rapidly changing global economic environment, potentially hindering competitiveness in foreign markets. The report concludes by suggesting that GCC countries may need to adopt more flexible domestic economic policies to maintain competitiveness. The report also provides references to support the analysis.

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Question one
Advantages of using pegged exchange rate system
Pegged exchange rate system which is also known as fixed exchange rate system, has enabled
elimination of risks and uncertainty in GCC countries. This ensures stability in the economic
growth of the countries since the growth of trade demands is made stable. Fluctuations in
exchange rates are also eliminated with this type of exchange rate system, therefore
encouraging international trade within this countries and import and export is as well made
easier.
The exchange rate system also attracts more foreign investors in the countries; most investors
prefer moving and investing in these countries due to stability in the exchange rate. This in
turn results to steady economic growth. Since the countries host most foreigners’ political
stability is also ensured for the security and long stay of the foreigners (Goldberg, 2017).
Disadvantages of using pegged exchange rate system
The rate system denies countries to glow in the international competitive environment. This
limits the home products to be competitive in the foreign market due to use of fixed exchange
rate system, which does not fit in the continuous rapid change international competitive
environment that requires changes in the domestic economic policies.
Question two
These countries therefore do not need pegged exchange rate system anymore because it limits
the countries to grow and become competitive in the foreign market. The countries need to
set up domestic economic policies that are flexible to enable the products exported to also
remain competitive in the foreign market (Ma, 2009).

References
Goldberg, D. (2017). Predicting Pegged Exchange Rate Currency Collapse: A Literature
Review. SSRN Electronic Journal. doi: 10.2139/ssrn.3035032
Ma, Y. (2009). External Shocks, Balance Sheet Contagion, and Speculative Attack on the
Pegged Exchange Rate System. Review Of Development Economics, 13(1), 87-98. doi:
10.1111/j.1467-9361.2008.00464.x