ratea. However, the belief that floating rates would insulate national economies from external shocks and from the effects of other countries' policies proved mistaken. The experience of tiore than 12 years of floating rates has sho9'n thac national economies have perhaps become even more sensilive to outside shocks and policies, narrorring the scope for national autonomy in the design of domestic poltcies. Developing countrles, in particular, have experienced serious dtfficul.tles under lhe present exchange ra!e r69ime. 33. A higher degree of variability of nomlnal exchange rates r"as expected ' but movements in lhese rates have far exceeded expectations and have affected real exchange rates (corrected by inflation), $hich have shown persistent medium-term misalignments and sharp short-run variations usually unrelated to fundamental econonic conditions such as trade conpetitiveness and current account balances' Volatility and misalignments in real- exchange rates involve significant costs since misleading market signals and deep uncertainty about future conditions make investment decisions more difficult. Overvaluation may lead to short-term gains against inflation, but it exacerbates trade frictions and encourages protectionism. Undervaluation may promote exports' but it increases inflationary Dressu r es.A/40 /708 Engli sh Page 10 34. when exchange rates of key currencies have shown persistent rnisalignments and have fluctuated widely it has been largely due to three sets of factorsr divergentpublic or private perceptions of the sustainability of fiscal and monetarypolicies, lack of co-ordination in macro-economic policiest and the new characCeriseics of the currency markets, in lrhich huge amounts of funds can beshifted around the world.
**Analysis**
The text discusses the impact of floating exchange rates on national economies, highlighting the increased sensitivity to external shocks and policies, as well as the volatility and misalignments in real exchange rates. The text also mentions the effects of these phenomena on investment decisions, trade, and inflation. The discussion is centered around the macroeconomic policies and the behavior of currency markets.

**Category**
International trade, Economics