Another strategy for deterring speculative attacks on a fixed exchange rate is to build a “war chest” of foreign-currency reserves. To be effective in today’s world of highly mobile capital, the war chest may have to be sizable indeed; and for countries with large government debts and high domestic interest rates, holding great quantities of low-yielding reserves can have serious fiscal consequences.
In any case, strategies to increase the defensibility of the peg ignore the broader issue of the role of the exchange rate in macroeconomic adjustment. For an individual country, forcing adjustment to a mis-valued exchange rate through domestic price changes is likely to be far more difficult and costly than an adjustment occurring through exchange rate depreciation or appreciation.