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Exchange rate volatility and productivity growth: The role of financial development

  • Aghion, Philippe
  • Bacchetta, Philippe
  • Rancière, Romain
  • Rogoff, Kenneth

The vast empirical exchange rate literature finds the effect of exchange rate volatility on real activity to be small or insignificant. In contrast, this paper offers empirical evidence that real exchange rate volatility can have a significant impact on productivity growth. However, the effect depends critically on a country's level of financial development. The 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.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 56 (2009)
Issue (Month): 4 (May)
Pages: 494-513

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Handle: RePEc:eee:moneco:v:56:y:2009:i:4:p:494-513
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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