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Exchange Rate Volatility and Productivity Growth: The Role of Financial Development

Philippe Aghion, Philippe Baccheta, Romain Ranciere () and Kenneth Rogoff ()
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Philippe Baccheta: Study Center Gerzensee, Swiss Finance Institute & CEPR

No 06-16, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper offers empirical evidence that real exchange rate volatility can have a significant impact on the long-term rate of productivity growth, but the e¤ect depends critically on a country's level of financial development. For countries with relatively low levels of financial development, exchange rate volatility generally reduces growth, whereas for financially advanced countries, there is no significant effect. Our empirical analysis is based on an 83 country data set spanning the years 1960-2000; our results appear robust to time window, alternative measures of ?nancial development and exchange rate volatility, and outliers. We also offer a simple monetary growth model in which real exchange rate uncertainty exacerbates the negative investment e¤ects of domestic credit market constraints. 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.

Keywords: exchange rate regime; financial development; growth (search for similar items in EconPapers)
JEL-codes: E44 F33 F43 O42 (search for similar items in EconPapers)
Date: 2006-05
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http://papers.ssrn.com/sol3/papers.cfm?abstract_id=935247 (application/pdf)

Related works:
Journal Article: Exchange rate volatility and productivity growth: The role of financial development (2009) Downloads
Working Paper: Exchange rate volatility and productivity growth: The role of financial development (2009)
Working Paper: Exchange Rate Volatility and Productivity Growth: The Role of Financial Development (2009) Downloads
Working Paper: Exchange Rate Volatility and Productivity Growth: The Role of Financial Development (2006) Downloads
Working Paper: Exchange Rate Volatility and Productivity Growth: The Role of Financial Development (2006) Downloads
Working Paper: Exchange Rate Volatility and Productivity Growth: The Role of Financial Development (2006) Downloads
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