International Trade Flows Under Flexible Exchange Rates

World trade has grown rapidly since the breakdown of the Bretton Woods system of fixed exchange rates in early 1973. Although much of the nominal trade growth resulted from inflation, it is apparent that world trade has continued to prosper despite the increase in exchange rate variability permitted by the 1973 shift from fixed to floating exchange rates. Nevertheless, some observers have argued that exchange rate uncertainty may have had an adverse impact on trade. If these observers are correct, the growth in trade of recent years has been the result of favorable influences which have more than offset the adverse impact of exchange rate uncertainty. This article examines the macroeconomic determinants of international trade flows between developed countries, giving special attention to the effects of exchange rate varia bility. The article also analyzes whether and to what extent fluctuations in bilateral exchange rates have had an adverse impact on bilateral trade flows. THE DETERMINANTS OF