ABSTRACT
Exchange rates and capital flows are inseparable. Beyond the confines of barter, foreign trade requires either a loan or immediate cash settlement, in a currency that is foreign to the importer or the exporter (and sometimes to both). So trade frequently triggers capital flows. The time dimension of trade is richer still. Just as trades do not have to be balanced, they do not need to be synchronised either. This year's exports may be spent on future imports, or alternatively may be paying for previous imports. Intertemporal trade implies capital flows must take place, as agents are trading claims on future income. International capital flows do not just allow agents to restructure the time-profiles of their expected purchases and production: they can provide insurance, too. Capital flows permit trade across states as well as trade across dates. Capital flows may therefore also trigger trade. The price mechanism that triggers adjustment in trade flows will be linked to the exchange rate.
