Should monetary policy be guided by the need to maintain currency parities or by the domestic needs of the economy, with currency rates left free to find their own levels? In other words, fixed or floating exchange rates? There seems to be an emerging consensus in favor of what is known as the polar approach.
For areas in which trade is extensive, such as the European Union or, indeed, the United States, transaction costs can be minimized by fixed rates within the union or by the extreme case of fixed rates--that is, by adopting a common currency. But outside the union, flexibility is necessary and countries have gone over to floating rates.