By affecting the demand for foreign currency, current account imbalances could influence exchange rates directly, or as noted above, they could affect expertations about future exchange rates and hence, through attemped adjustments in portfolios, could affect today's exchange rates.

 

To sum up, exchange change rate during this period of floating have not been "unstable" over time, and indeed, the movements have been fully explicable in terms of correction for inflation differentials combined with a corrective respone to current account imbalances.

 

The monetary authorities should strive to limit radical and unjustified movements in exchange rates, which means that they will sometimes have to take large, open positions in foreign currencies. Their interventions can and should be reversed later, so as to allow exchange rates to move over time in response to market pressures.