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

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  • Romain Ranciere
  • Philippe Bacchetta
  • Philippe Aghion
  • Kenneth Rogoff

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.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 214.

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Date of creation: May 2005
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Handle: RePEc:bge:wpaper:214

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References

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Citations

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Cited by:
  1. Philippe Aghion & George-Marios Angeletos & Abhijit Banerjee & Kalina Manova, 2005. "Volatility and Growth: Credit Constraints and Productivity-Enhancing Investment," NBER Working Papers 11349, National Bureau of Economic Research, Inc.
  2. Schnabl, Gunther, 2008. "Exchange rate volatility and growth in small open economies at the EMU periphery," Economic Systems, Elsevier, Elsevier, vol. 32(1), pages 70-91, March.
  3. Andreas Hoffmann & Gunther Schnabl, 2011. "The theory of optimum currency areas and growth in emerging markets," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 18(6), pages 513-517.
  4. Jay C. Shambaugh & Julian di Giovanni, 2006. "The Impact of Foreign Interest Rates on the Economy: The Role of the Exchange Rate Regime," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp116, IIIS.
  5. Gunther Schnabl, 2009. "Exchange Rate Volatility and Growth in Emerging Europe and East Asia," Open Economies Review, Springer, Springer, vol. 20(4), pages 565-587, September.
  6. Laura Alfaro & Areendam Chanda & Sebnem Kalemli-Ozcan & Selin Sayek, 2006. "How Does Foreign Direct Investment Promote Economic Growth? Exploring the Effects of Financial Markets on Linkages," NBER Working Papers 12522, National Bureau of Economic Research, Inc.
  7. Arratibel, Olga & Furceri, Davide & Martin, Reiner, 2008. "Real convergence in Central and Eastern European EU Member States: which role for exchange rate volatility?," Working Paper Series, European Central Bank 0929, European Central Bank.
  8. Morar Triandafil, Cristina & Brezeanu, Petre & Huidumac, Catalin & Morar Triandafil, Adrian, 2011. "The Drivers of the CEE Exchange Rate Volatility - Empirical Perspective in the context of the Recent Financial Crisis," Journal for Economic Forecasting, Institute for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 212-229, March.
  9. Julian di Giovanni & Jay C. Shambaugh, 2006. "The Impact of Foreign Interest Rateson the Economy," IMF Working Papers, International Monetary Fund 06/37, International Monetary Fund.
  10. Petreski, Marjan, 2009. "Analysis of exchange-rate regime effect on growth: theoretical channels and empirical evidence with panel data," Economics Discussion Papers, Kiel Institute for the World Economy 2009-49, Kiel Institute for the World Economy.
  11. Petreski, Marjan, 2009. "Exchange-rate regime and economic growth: a review of the theoretical and empirical literature," Economics Discussion Papers, Kiel Institute for the World Economy 2009-31, Kiel Institute for the World Economy.
  12. Eduardo Levy Yeyati, 2006. "Exchange Rate Regimes in the 2000s: A Latin American Perspective," Business School Working Papers, Universidad Torcuato Di Tella exchangerate, Universidad Torcuato Di Tella.

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