But, without the flexibility a floating currency can provide, it will take longer, be more difficult, and cost more overall in terms of lost output and jobs. Now, when the exchange rate moves up or down, there has to be some way to anchor expectations about its value.
Otherwise, the freedom of the currency to float could, in the context of a downward movement, undermine confidence in its value on world markets and at home. Under our approach to monetary policy, the domestic inflation target serves as that all-important anchor for the exchange rate. The inflation target and a floating currency work well together – indeed, they reinforce each other.