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

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

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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File URL: http://research.barcelonagse.eu/tmp/working_papers/214.pdf
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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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  1. Jeffrey Frankel & Andrew Rose, 2002. "An Estimate Of The Effect Of Common Currencies On Trade And Income," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 437-466, May.
  2. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
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  4. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 1-48, February.
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  7. Philippe Bacchetta & Eric van Wincoop, 2002. "A Theory of the Currency Denomination of International Trade," NBER Working Papers 9039, National Bureau of Economic Research, Inc.
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  12. Ilan Goldfajn & Rodrigo Valdés, 1997. "The Aftermath of Appreciations," Working Papers Central Bank of Chile 02, Central Bank of Chile.
  13. Duarte, Margarida & Stockman, Alan C., 2005. "Rational speculation and exchange rates," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 3-29, January.
  14. Loayza, Norman & Ranciere, Romain, 2004. "Financial development, financial fragility, and growth," Policy Research Working Paper Series 3431, The World Bank.
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  31. Maurice Obstfeld, 2006. "Pricing-to-Market, the Interest-Rate Rule, and the Exchange Rate," NBER Working Papers 12699, National Bureau of Economic Research, Inc.
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