As explained more fully in chapter 16, fixing the exchange rate causes an economy’s money supply to grow at the money-supply growth rate that characterizes its major trading partners. In effect, monetary policy must be devoted to fixing the exchange rate, so control over money growth is lost. Suppose, for example, our rate of inflation is 5 percent and that of our trading partners is 15 percent. If we fix the exchange rate, each year our goods become 10 percent less expensive to foreigners, and foreign goods become 10 percent more expensive to us. We soon experience a dramatic increase in our exports and a decrease in our imports, producing a surplus of foreign currency in the hands of our citizens. When the central bank exchanges the foreign currency for dollars at the fixed rate, these dollars increase the domestic money supply. By targeting on the exchange rate the central bank loses control over the money supply.