ABSTRACT
Analyses of international trade similarly refute the notion that freely floating, or individual country-administered, exchange rates can produce balanced, and therefore sustainable, world trade. This chapter attempts to add to the cumulative weight of these and other theoretical and empirical critiques of exchange-rate-based trade by addressing the purely logical issue of whether freely floating, or administered but not coordinated across multiple countries, exchange rates can produce a stable, balanced, and sustainable international trade solution even if all of the standard assumptions are fully satisfied. It proves that the alternative possibility of a unique solution with three bilateral trade imbalances will be, barring extreme coincidence, unstable and thus also not a viable economic solution. The chapter shows that the same is true for a general N-country model. Exchange-rate-based trading theories assume that, under appropriate conditions, exchange-rate adjustment will cause international trade to balance.
