The real world is, however, far from the idealized representation of the theory. When the hypotheses of perfectly flexible prices and costless adjustment are abandoned, and we consider the actual working of the financial system in a world of imperfect information and incomplete markets, the presumption that exchange rates will smoothly adjust to reflect changes in fundamentals soon appears unrealistic.
In practice, changing market perceptions may make exchange rates volatile and lead them to diverge from fundamentals, especially where markets are thin and uncertainty high, as it is often the case in emerging economies. This experience explains why so many countries have displayed in practice a strong “fear of floating”.