To understand the benefits and costs of floating a currency, we need to make a simple comparison between a floating exchange rate and a fixed (or pegged) exchange rate. A floating exchange rate refers to the situation when the currency's value is allowed to fluctuate according to the foreign exchange market. The value of this currency is determined by the supply and demand shocks in the market of the currency (foreign exchange market). Most of the countries adopting the free, floating exchange rate regimes (floaters) are developed small open economies, such as Canada, Australia, Sweden.[2]
The basic debate between fixed and floating exchange rate regimes is mentioned in most principle of macroeconomics textbooks, where the Mundell–Fleming model is presented to explain the exchange rate regimes. Three, potentially desirous policies, are called “impossible trinity” because a country could not achieve all three at the same time