A floating exchange rate increases exchange rate volatility, which can pose a major problem for developing countries. Developing countries often have most of their liabilities in other currencies rather than in the local currency. Businesses and banks in these economies earn their income in the local currency, but have to convert it into another currency to pay their debts. In the event of an unexpected depreciation of the local currency, it will be much more difficult for companies and banks to pay their debts. This jeopardizes the stability of the entire financial sector of the economy. In addition, a government`s stubbornness in defending a fixed exchange rate in a trade deficit will force it to apply deflationary measures (increased taxation and decreased availability of money) that can lead to unemployment. Finally, other fixed-exchange-rate countries may also take retaliatory measures when a given country uses its currency to defend its exchange rate. [Citation required] Purchasing power parity is a way of determining the value of a product after adjusting for price differences and the exchange rate. In fact, it makes no sense to say that a book costs $20 in the Us and $15 in England: the comparison is not equivalent. If we know that the exchange rate is £2/$, the book is sold in England for $30, so the book in England is actually more expensive A fixed exchange rate system can also be used to control the behavior of a currency, for example. B by limiting inflation rates.
However, the coupled currency is then controlled by its reference value. .