<p>Why would a sovereign state choose an exchange rate peg over the demonetization of the local currency, replaced by hard currency?</p>

<p>In the case of the West and Central African CFA Francs, France has an obligation to support the peg to the Euro. Would it not be more advantageous for both parties to facilitate the distribution of Euros throughout the CFA Franc area instead?</p>

<p>Considering Ecuador's and Zimbabwe's experiences, it would appear demonetization is the end result of very dramatic currency crises and never really a choice. But it seems to have all the advantages of a peg (stability, trade facilitation, etc) without any of the disadvantages (currency speculators, need to maintain reserves, etc).</p>

<p>What am I missing here?</p>

<p><strong>EDIT</strong></p>

<p><a href="https://en.wikipedia.org/wiki/Economy_of_Ecuador#Economy_1998.E2.80.932006" rel="nofollow">A brief description</a> from Wikipedia of the conditions in Ecuador leading up to the official adoption of the USD in 2000. </p>

<p>And for Zimbabwe, <a href="http://www.bbc.com/news/world-africa-33105400" rel="nofollow">an article</a> from the BBC describing the well-known hyperinflation the country suffered through before abandoning it's currency.</p>

<p>There are a few more links I wanted to include, but unfortunately my rep is too low.</p>

CC BY-SA 3.0
2015-08-09T13:37:45.383Z
Good question. Could you please add a link to Ecuador's and Zimbabwe's experiences? I actually don't know what you mean and it might also be useful for others.
Giskard
CC BY-SA 3.0
2015-08-09T15:40:08.480Z
Added. I basically just meant that economic conditions had deteriorated to the point that it doesn't appear either case had much of an option. Maybe a better way to word the question: Why is currency substitution only considered when a state has exhausted all other options, but many states maintain a peg?
wchatx
CC BY-SA 3.0
2015-08-09T17:26:14.920Z
I just remembered this question: http://economics.stackexchange.com/q/6350/1601
Perhaps the answer there also suits your question with the addendum that you can easily remove a peg (Switzerland did so in January 2015) but it is much harder to withdraw from a currency union. Some reasons for this are listed here: http://economics.stackexchange.com/a/6355/1601
Giskard
CC BY-SA 3.0
2015-08-09T17:39:47.670Z
Some great points in the answer you linked to. Though in this case, it seems even easier to unilaterally adopt a foreign currency than abandon a peg. Or at least, it's easier than maintaining a peg (which the policy setters at the SNB could likely attest). I can see that my question is potentially so broad that it just leads to other questions.
wchatx
CC BY-SA 3.0
2015-08-09T17:45:56.613Z
Also, just read your answer on the Greek question. Fascinating stuff. First I've read of a 'euro pause'
wchatx
<monetary-policy><exchange-rates><currency-peg>
Currency Peg or Currency Substitution/Dollarize?
wchatx
# Currency Peg or Currency Substitution/Dollarize?

(Asked by: username_0 on 2015-08-09)

Why would a sovereign state choose an exchange rate peg over the demonetization of the local currency, replaced by hard currency?

In the case of the West and Central African CFA Francs, France has an obligation to support the peg to the Euro. Would it not be more advantageous for both parties to facilitate the distribution of Euros throughout the CFA Franc area instead?

Considering Ecuador's and Zimbabwe's experiences, it would appear demonetization is the end result of very dramatic currency crises and never really a choice. But it seems to have all the advantages of a peg (stability, trade facilitation, etc) without any of the disadvantages (currency speculators, need to maintain reserves, etc).

What am I missing here?

**EDIT**

[A brief description](https://en.wikipedia.org/wiki/Economy_of_Ecuador#Economy_1998.E2.80.932006) from Wikipedia of the conditions in Ecuador leading up to the official adoption of the USD in 2000.

And for Zimbabwe, [an article](http://www.bbc.com/news/world-africa-33105400) from the BBC describing the well-known hyperinflation the country suffered through before abandoning it's currency.

There are a few more links I wanted to include, but unfortunately my rep is too low.

**Tags:** monetary-policy, exchange-rates, currency-peg

> **Comments:**
> **username_1**: Good question. Could you please add a link to Ecuador's and Zimbabwe's experiences? I actually don't know what you mean and it might also be useful for others.  
> **username_0**: Added. I basically just meant that economic conditions had deteriorated to the point that it doesn't appear either case had much of an option. Maybe a better way to word the question: Why is currency substitution only considered when a state has exhausted all other options, but many states maintain a peg?  
> **username_1**: I just remembered this question: http://economics.stackexchange.com/q/6350/1601 Perhaps the answer there also suits your question with the addendum that you can easily remove a peg (Switzerland did so in January 2015) but it is much harder to withdraw from a currency union. Some reasons for this are listed here: http://economics.stackexchange.com/a/6355/1601  
> **username_0**: Some great points in the answer you linked to. Though in this case, it seems even easier to unilaterally adopt a foreign currency than abandon a peg. Or at least, it's easier than maintaining a peg (which the policy setters at the SNB could likely attest). I can see that my question is potentially so broad that it just leads to other questions.  
> **username_0**: Also, just read your answer on the Greek question. Fascinating stuff. First I've read of a 'euro pause'  

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## 0 answers

