It can be very difficult for a small country to maintain a peg against another currency if capital is flowing out of the country and foreign exchange traders are speculating against the currency.

Question

Quizplus · Accepted Answer

When there is capital outflow and speculation against a currency, it puts pressure on the central bank of a small country to maintain the peg against another currency. To defend the peg, the central bank needs to use its foreign exchange reserves, which can deplete quickly in such situations. Therefore, maintaining a peg against another currency can be challenging for a small country.

It Can Be Very Difficult for a Small Country to Maintain