Perhaps the most frequent charge leveled against the operation of the flexible exchange rate system is that movements of the rates have been too volatile, with consequent damaging effects on international trade and investment and on the pursuit of macroeconomic stability. Parts 2 and 3 focus on these and related issues. The papers presented in part 2 review the technical literature on the causes and effects of exchange rate volatility.
The papers and the subsequent discussion clearly indicate that although the adoption of floating rates has not brought all of the benefits some had hoped for, it has not brought the disasters others had feared. Flexible exchange rates have not eliminated the international transmission of economic disturbances from one country to another, but countries such as Germany and Switzerland do appear to have acquired a greater degree of monetary control as a result of floating. The breakdown in international economic cooperation and the severe damage to international trade that many feared have not materialized. Regarding perhaps the most controversial current issue in this area -- the effects of flexible exchange rates on inflation -- it is argued that in general the effects of exchange rate variations cannot be determined without knowing their causes and, moreover, that we do not yet have a good idea of the net effects of the adoption of flexible exchange rates on world inflationary pressures.