Q. What are the advantages and disadvantages of free float?
Advantages: It is one of the most suitable ER regimes for transitional countries that experience external shocks like,
a. Terms of trade deterioration
b. Loss of competitiveness, real appreciation of the national currency c. International trade volume decline
d. Weak regional integration
e. Lack of mature and fully functional financial markets f. Difficulty of determining the equilibrium.
Disadvantages: a. High inflation rate. b. Loss of the confidence in national currency c. Loss of traditional markets for exports. d. National currency devaluation.