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

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  • Benhima Kenza

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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Bibliographic Info

Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 10.09.

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Length: 31 pages + tables and figures
Date of creation: Aug 2010
Date of revision:
Publication status: Published in Open Economies Review, 23(3), July 2012, pp. 501-529
Handle: RePEc:lau:crdeep:10.09

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Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Fax: ++41 21 692.33.05
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Web page: http://www.hec.unil.ch/deep/publications/cahiers/series
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Keywords: exchange rate regimes; growth; liability dollarization;

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Cited by:
  1. Diallo, Ibrahima Amadou, 2012. "The effects of real exchange rate volatility on productivity growth," MPRA Paper 36171, University Library of Munich, Germany.
  2. repec:hal:cesptp:halshs-00960664 is not listed on IDEAS
  3. Jérôme Héricourt & Sandra Poncet, 2013. "Exchange Rate Volatility, Financial Constraints and Trade: Empirical Evidence from Chinese Firms," CESifo Working Paper Series 4303, CESifo Group Munich.
  4. Alexey Ponomarenko & Alexandra Solovyeva & Elena Vasilieva, 2013. "Financial dollarization in Russia: causes and consequences," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 6(2), pages 221-243, September.

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