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

  • Philippe Aghion

    (Harvard University & NBERute & CEPR)

  • Philippe Baccheta

    (Study Center Gerzensee, Swiss Finance Institute & CEPR)

  • Romain Ranciere

    (IMF Research Department)

  • Kenneth Rogoff

    (Harvard University & NBER)

This paper offers empirical evidence that real exchange rate volatility can have a significant impact on the long-term rate of productivity growth, but the e¤ect 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 ?nancial 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 e¤ects 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 Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 06-16.

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Length: 52 pages
Date of creation: May 2006
Date of revision:
Handle: RePEc:chf:rpseri:rp0616
Contact details of provider: Web page: http://www.SwissFinanceInstitute.ch

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