Faced with such developments, the exchange rate could be allowed to depreciate—that is, the price of foreign exchange could be allowed to increase. Such an outcome would not be desirable for The Bahamas.6  Therefore, we should be striving for an outcome, where other than for diversification residents are indifferent between holding deposits in local or foreign currency.
This would be an outcome where portfolio decisions are not materially driven by speculative movements to outrace expected depreciations in the exchange rate. Among other factors, 6  Given high import reliance, a fluctuating exchange rate would affect prices but little else, as it would not confer any competitive advantages to the economy.