When the international monetary system changed from a fixed to a floating system, economists generally believed that this new market based system could substantially decrease exchange rate misalignment problems between countries. However, empirical evidence in this area suggests that, during the post-Bretton Woods period, nominal exchange rates among developed countries have not followed macroeconomic fundamentals for a long period. Moreover, they have been extremely volatile in the short run. Although some economists believe that these problems have had a destructive effect on international commodity trade, there is still a considerable debate. This paper focuses on two important movements of real exchange rates (long-term variability and short-term volatility) during the post-Bretton Woods era (1974–1995), and their linkage with agriculture trade growth among 10 developed countries.; Using cross-sectional and panel data analyses, several empirical findings are obtained concerning the long-term variability issue. First, at a total trade level, there is only weak evidence that long-term real exchange rate variability has been linked with the trade growth rate. In their earlier study, De Grauwe and de Bellefroid (1986) found a significant negative relationship between these two variables. With 11 more years in my sample, I find contradictory results. Second, in spite of this weak evidence, I find that the relationship is significant for some sectors. For instance, for large-scale industries, there is no statistically significant linkage between the two variables, while strong negative relationships between them are found for sectors producing relatively homogeneous products. Compared to other sectors, the growth of agricultural trade has been adversely affected by long-term variability in real exchange rates.; Concerning the short-term volatility issue, the estimation results are similar to those for the long-term variability issue. For instance, using a cross-sectional approach, a negative relationship between the short-term volatility measure and trade growth in the case of the total, manufacturing, and agricultural sectors is found. By examining the cross-sectional relationship between the long-term variability and short-term volatility measures, I find this similarity is due to the strong positive correlation between two measures.
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