ABSTRACT
This chapter looks at some additional considerations in the choice between fixed and flexible rates. First, it examines the argument that greater flexibility reduces trade and that this represents a cost of greater exchange rate flexibility. Second, it examines the argument that greater flexibility reduces the need for international reserves and that this is a benefit flowing from greater flexibility. Third, it examines the argument that the adoption of flexible exchange rates may lead to vicious (virtuous) circles of devaluation—inflation (revaluation—deflation) and that this represents a cost associated with a flexible rate regime.
