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

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Author Info
Aghion, Philippe
Bacchetta, Philippe
Rancière, Romain
Rogoff, Kenneth

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Abstract

This paper offers empirical evidence that real exchange rate volatility can have a significant impact on long-term rate of productivity growth, but the effect 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 financial 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 effects 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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5629.

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Date of creation: Apr 2006
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Handle: RePEc:cpr:ceprdp:5629

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Related research
Keywords: exchange rate regime; financial development; growth;

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Find related papers by JEL classification:
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
O42 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models

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