Exchange Rate Volatility and Productivity Growth: the Role of Liability Dollarization

Kenza Benhima

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

Abstract: This paper studies how liability dollarization conditions the effect of exchange rate flexibility on growth. It develops a model with credit-constrained firms facing liquidity shocks denominated in tradables while their revenues are both in tradable and nontradables. With frictions in the reallocation between tradables and nontradables, a peg is more growth-enhancing than a float in countries with dollarized debt because it stabilizes firms' cash flows. However, this relative advantage diminishes when dollarization decreases. These theoretical predictions are confirmed by an empirical analysis on a panel of 76 countries spanning 1995-2004: the higher the degree of dollarization, the more negative the impact of exchange rate flexibility on growth.

Keywords: exchange rate regimes; growth; liability dollarization (search for similar items in EconPapers)
JEL-codes: O16 O24 O41 O42 (search for similar items in EconPapers)
Pages: 31 pages + tables and figures
Date: 2010-08
New Economics Papers: this item is included in nep-ifn and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published in Open Economies Review, 23(3), July 2012, pp. 501-529

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Related works:
Journal Article: Exchange Rate Volatility and Productivity Growth: The Role of Liability Dollarization (2012)
Working Paper: Exhange Rate Volatility and Productivity Growth: The Role of Liability Dollarization (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:lau:crdeep:10.09

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