With floating exchange rates,payments imbalances tend to be corrected by market-induced fluctuations in the exchange rate,and the need for exchange-rate stabilization and international reserves disappears.

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With floating exchange rates, the exchange rate is determined by supply and demand in the foreign exchange market. If a country has a payments imbalance (e.g. exports < imports), this will cause a depreciation of the currency, making exports cheaper and imports more expensive, which should eventually lead to a correction of the imbalance. Therefore, there is no need for exchange-rate stabilization policies, such as buying or selling foreign currency, or maintaining large international reserves to defend the value of the currency.

With Floating Exchange Rates,payments Imbalances Tend to Be Corrected by Market-Induced