- Exchange rate is not a constraint of macro economic policy. This allows the interest to changed in order to achieve macroeconomic objectives.
- Makes monetary policy more effective. For example, changing the IR will reduce AD through both consumption and a fall in X-M.
- BoP problems are corrected automatically. As Exchange rate falls it becomes easier to export again.
- Helps the economy deal with external shocks.EG, global recession = EXR down as demand for imports is lower. As this falls exports may recover
- No pressure of speculative attacks as EXR won't become under vauled.
- Self correction- EG when exports are high EXR will increase
- Depreciation =imported inflation. + reduction in purchasing power of households.
- Depreciation in the short run may not be noticed and therefore costs more. because of, Fixed term contracts, availability of subs, imperfect information.