IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=935247
Download Restriction: no

Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 06-16.

as
in new window

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

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Ilan Goldfajn & Rodrigo O. Valdés, 1999. "The Aftermath of Appreciations," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 229-262.
  2. Aasim M. Husain & Ashoka Mody & Nienke Oomes & Robin Brooks & Kenneth Rogoff, 2003. "Evolution and Performance of Exchange Rate Regimes," IMF Working Papers 03/243, International Monetary Fund.
  3. Djankov, Simeon & McLiesh, Caralee & Shleifer, Andrei, 2007. "Private credit in 129 countries," Journal of Financial Economics, Elsevier, vol. 84(2), pages 299-329, May.
  4. Philippe Aghion & Peter Howitt & David Mayer-Foulkes, 2004. "The Effects of Financial Development on Convergence: Theory and Evidence," DEGIT Conference Papers c009_021, DEGIT, Dynamics, Economic Growth, and International Trade.
  5. Levine, Ross & Renelt, David, 1991. "A sensitivity analysis of cross-country growth regressions," Policy Research Working Paper Series 609, The World Bank.
  6. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
  7. Robert P. Flood & Andrew K. Rose, 1993. "Fixing Exchange Rates: A Virtual Quest for Fundamentals," NBER Working Papers 4503, National Bureau of Economic Research, Inc.
  8. Levy-Yeyati, Eduardo & Sturzenegger, Federico & Reggio, Iliana, 2006. "On the Endogeneity of Exchange Rate Regimes," Working Paper Series rwp06-047, Harvard University, John F. Kennedy School of Government.
  9. Mendoza, Enrique G., 1997. "Terms-of-trade uncertainty and economic growth," Journal of Development Economics, Elsevier, vol. 54(2), pages 323-356, December.
  10. Mark Gertler & Simon Gilchrist, 1991. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," NBER Working Papers 3892, National Bureau of Economic Research, Inc.
  11. Peter B. Clark & Shang-Jin Wei & Natalia T. Tamirisa & Azim M. Sadikov & Li Zeng, 2004. "A New Look at Exchange Rate Volatility and Trade Flows," IMF Occasional Papers 235, International Monetary Fund.
  12. Atish R. Ghosh & Anne-Marie Gulde & Holger C. Wolf, 2003. "Exchange Rate Regimes: Choices and Consequences," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262072408.
  13. Maurice Obstfeld, 2006. "Pricing-to-Market, the Interest-Rate Rule, and the Exchange Rate," NBER Working Papers 12699, National Bureau of Economic Research, Inc.
  14. Eduardo Levy-Yeyati & Federico Sturzenegger, 2003. "To Float or to Fix: Evidence on the Impact of Exchange Rate Regimes on Growth," American Economic Review, American Economic Association, vol. 93(4), pages 1173-1193, September.
  15. Acemoglu, Daron & Johnson, Simon & Robinson, James A & Thaicharoen, Yunyong, 2002. "Institutional Causes, Macroeconomic Symptoms: Volatility, Crises and Growth," CEPR Discussion Papers 3575, C.E.P.R. Discussion Papers.
  16. Hausmann, Ricardo & Panizza, Ugo & Rigobon, Roberto, 2006. "The long-run volatility puzzle of the real exchange rate," Journal of International Money and Finance, Elsevier, vol. 25(1), pages 93-124, February.
  17. Michael B. Devereux & Philip R. Lane, 2002. "Understanding Bilateral Exchange Rate Volatility," Trinity Economics Papers 200211, Trinity College Dublin, Department of Economics.
  18. repec:rus:hseeco:181565 is not listed on IDEAS
  19. Olivier Jeanne & Andrew K. Rose, 2002. "Noise Trading and Exchange Rate Regimes," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 537-569.
  20. Robert Summers & Alan Heston, 1991. "The Penn World Table (Mark 5): An Expanded Set of International Comparisons, 1950–1988," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 327-368.
  21. Christopher F Baum & Mark E. Schaffer & Steven Stillman, 2002. "Instrumental variables and GMM: Estimation and testing," United Kingdom Stata Users' Group Meetings 2003 02, Stata Users Group.
  22. Hau, Harald, 2002. "Real Exchange Rate Volatility and Economic Openness: Theory and Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 611-30, August.
  23. Raddatz, Claudio, 2006. "Liquidity needs and vulnerability to financial underdevelopment," Journal of Financial Economics, Elsevier, vol. 80(3), pages 677-722, June.
  24. Paolo Mauro & Grace Juhn, 2002. "Long-Run Determinants of Exchange Rate Regimes; A Simple Sensitivity Analysis," IMF Working Papers 02/104, International Monetary Fund.
  25. Eric van Wincoop & Philippe Bacchetta, 2003. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," NBER Working Papers 9498, National Bureau of Economic Research, Inc.
  26. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," International Trade 0012003, EconWPA.
  27. Garber, P.M. & Svensson, L.E.O., 1994. "The Operation and Collapse of Fixed Exchange Rate Regimes," Papers 588, Stockholm - International Economic Studies.
  28. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476.
  29. Raghuram G. Rajan & Luigi Zingales, . "Financial Dependence and Growth," CRSP working papers 344, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  30. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
  31. Eric van Wincoop & Philippe Bacchetta, 2000. "Does Exchange-Rate Stability Increase Trade and Welfare?," American Economic Review, American Economic Association, vol. 90(5), pages 1093-1109, December.
  32. Bleaney Michael & Francisco Manuela, 2007. "Exchange Rate Regimes, Inflation and Growth in Developing Countries -- An Assessment," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-20, July.
  33. World Bank, 2002. "World Development Indicators 2002," World Bank Publications, The World Bank, number 13921, April.
  34. Barry J. Eichengreen & Inci Ötker & A. Javier Hamann & Esteban Jadresic & R. B. Johnston & Hugh Bredenkamp & Paul R. Masson, 1998. "Exit Strategies; Policy Options for Countries Seeking Exchange Rate Flexibility," IMF Occasional Papers 168, International Monetary Fund.
  35. Thorsten Beck & Ross Levine & Norman Loayza, 1999. "Financial Intermediation and Growth: Causality and Causes," Working Papers Central Bank of Chile 56, Central Bank of Chile.
  36. Claudio Bravo-Ortega & Julian di Giovanni, 2006. "Remoteness and Real Exchange Rate Volatility," IMF Staff Papers, Palgrave Macmillan, vol. 53(si), pages 6.
  37. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2001. "A Corporate Balance Sheet Approach to Currency Crises," CEPR Discussion Papers 3092, C.E.P.R. Discussion Papers.
  38. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  39. Devereux, Michael B. & Engel, Charles, 2002. "Exchange rate pass-through, exchange rate volatility, and exchange rate disconnect," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 913-940, July.
  40. Ramey, Garey & Ramey, Valerie A, 1995. "Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review, American Economic Association, vol. 85(5), pages 1138-51, December.
  41. Andrew K. Rose, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," NBER Working Papers 7432, National Bureau of Economic Research, Inc.
  42. Reuven Glick & Ramon Moreno & Mark M. Spiegel, 2001. "Financial crises in emerging markets," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue mar.23.
  43. Paul De Grauwe & Gunther Schnabl, 2008. "Exchange Rate Stability, Inflation, and Growth in (South) Eastern and Central Europe," Review of Development Economics, Wiley Blackwell, vol. 12(3), pages 530-549, 08.
  44. Aghion, Philippe & Banerjee, Abhijit, 2005. "Volatility and Growth," OUP Catalogue, Oxford University Press, number 9780199248612.
  45. Michael W. Klein & Jay C. Shambaugh, 2004. "Fixed Exchange Rates and Trade," NBER Working Papers 10696, National Bureau of Economic Research, Inc.
  46. Robert Kollmann, 2002. "Monetary policy rules in the open economy: effects of welfare and business cycles," ULB Institutional Repository 2013/7628, ULB -- Universite Libre de Bruxelles.
  47. Assaf Razin & Yona Rubinstein, 2005. "Evaluation of Currency Regimes: The Unique Role of Sudden Stops," NBER Working Papers 11785, National Bureau of Economic Research, Inc.
  48. Dollar, David, 1992. "Outward-Oriented Developing Economies Really Do Grow More Rapidly: Evidence from 95 LDCs, 1976-1985," Economic Development and Cultural Change, University of Chicago Press, vol. 40(3), pages 523-44, April.
  49. Sebastian Edwards & Eduardo Levy Yeyati, 2004. "Flexible Exchange Rates as Shock Absorbers," Business School Working Papers exchangerates, Universidad Torcuato Di Tella.
  50. Hnatkovska, Viktoria & Loayza, Norman, 2004. "Volatility and growth," Policy Research Working Paper Series 3184, The World Bank.
  51. Romain Ranciere & Norman Loayza, 2004. "Financial Development, Financial Fragility and Growth," Working Papers 192, Barcelona Graduate School of Economics.
  52. Rudiger Dornbusch, 1985. "Exchange Rates and Prices," NBER Working Papers 1769, National Bureau of Economic Research, Inc.
  53. Razin, Assaf & Rubinstein, Yona, 2004. "Growth Effects of the Exchange-Rate Regime and the Capital Account Openness in A Crisis-Prone World Market: A Nuanced View," CEPR Discussion Papers 4475, C.E.P.R. Discussion Papers.
  54. Husain, Aasim M. & Mody, Ashoka & Rogoff, Kenneth S., 2005. "Exchange rate regime durability and performance in developing versus advanced economies," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 35-64, January.
  55. Steve Bond, 2002. "Dynamic panel data models: a guide to microdata methods and practice," CeMMAP working papers CWP09/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  56. Richard Baldwin, 1989. "The Growth Effects of 1992," NBER Working Papers 3119, National Bureau of Economic Research, Inc.
  57. Margarida Duarte & Alan C. Stockman, 2001. "Rational Speculation and Exchange Rates," NBER Working Papers 8362, National Bureau of Economic Research, Inc.
  58. Justin M. Dubas & Byung-Joo Lee & Nelson C. Mark, 2005. "Effective Exchange Rate Classifications and Growth," NBER Working Papers 11272, National Bureau of Economic Research, Inc.
  59. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 1-48.
  60. Broda, Christian, 2004. "Terms of trade and exchange rate regimes in developing countries," Journal of International Economics, Elsevier, vol. 63(1), pages 31-58, May.
  61. Barry Eichengreen, 1992. "Golden Fetters: The Gold Standard and the Great Depression, 1919-1939," NBER Books, National Bureau of Economic Research, Inc, number eich92-1.
  62. repec:imf:imfwpa:05/01 is not listed on IDEAS
  63. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
  64. Baxter, Marianne & Stockman, Alan C., 1989. "Business cycles and the exchange-rate regime : Some international evidence," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 377-400, May.
  65. Frankel, Jeffrey & Rose, Andrew K., 2001. "An Estimate of the Effect of Common Currencies on Trade and Income," Working Paper Series rwp01-013, Harvard University, John F. Kennedy School of Government.
  66. Mussa, Michael, 1986. "Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 117-214, January.
  67. Frank Windmeijer, 2000. "A finite sample correction for the variance of linear two-step GMM estimators," IFS Working Papers W00/19, Institute for Fiscal Studies.
  68. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 7-46, 04.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:chf:rpseri:rp0616. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marilyn Barja)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.