Productivity Growth and the Exchange Rate Regime: The Role of Financial Development

Romain Ranciere, Philippe Bacchetta, Philippe Aghion and Kenneth Rogoff

No 214, Working Papers from Barcelona School of Economics

Abstract: This paper offers empirical evidence that a country's choice of exchange rate regime can have a significant impact on its medium-term rate of productivity growth. Moreover, the impact depends critically on the country's level of financial development, its degree of market regulation, and its distance from the global technology frontier. We illustrate how each of these channels may operate in a simple stylized growth model in which real exchange rate uncertainty exacerbates the negative investment effects of domestic credit market constraints. The empirical analysis is based on an 83 country data set spanning the years 1960-2000. Our approach delivers results that are in striking contrast to the vast existing empirical exchange rate literature, which largely finds the effects of exchange rate volatility on real activity to be relatively small and insignificant.

Date: 2005-05
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Working Paper: Productivity growth and the exchange rate regime: The role of financial development (2005)
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