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

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  • Kenza Benhima

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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.

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File URL: http://hdl.handle.net/10.1007/s11079-011-9205-5
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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 23 (2012)
Issue (Month): 3 (July)
Pages: 501-529

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Handle: RePEc:kap:openec:v:23:y:2012:i:3:p:501-529

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: Exchange rate regimes; Growth; Liability dollarization; O16; O24; O41; O42;

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References

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Citations

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Cited by:
  1. Heericourt, Jerome & Poncet, Sandra, 2013. "Exchange rate volatility, financial constraints, and trade : empirical evidence from Chinese firms," Policy Research Working Paper Series 6638, The World Bank.
  2. repec:hal:cesptp:halshs-00960664 is not listed on IDEAS
  3. Ponomarenko, Alexey & Solovyeva, Alexandra & Vasilieva, Elena, 2012. "Financial dollarization in Russia: causes and consequences," BOFIT Discussion Papers 36/2011, Bank of Finland, Institute for Economies in Transition.
  4. Diallo, Ibrahima Amadou, 2012. "The effects of real exchange rate volatility on productivity growth," MPRA Paper 36171, University Library of Munich, Germany.

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