Importance of Exchange Rates in World Economies

Floating exchange rates play an important role in facilitating adjustment to asymmetric disturbances and thereby promoting stability. Thus, a falling-off in demand for the export products of any one country may lead to growing unemployment if it is unable to lower the external value of its currency by easing its monetary policy. This advantage is compounded by disturbances calling for reductions in the real wage level. Since nominal wages are slow to change, such disturbances may cause significant oscillation in the unemployment rate.
Floating exchange rates are not, however, the only means by which an economy can adjust to shocks from outside. Other instruments for stabilizing the economy after a shock include capital movements, fiscal policy, flexible wages and other costs, and the mobility of production factors.
It is important to stress that floating exchange rates are a means for the national economy to adjust to major shocks from outside. …