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

  • Kenza Benhima

    ()

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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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
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=100323

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