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

Author

Listed:
  • Philippe Aghion

    (Havard University - Havard University, NBER - The National Bureau of Economic Research)

  • Philippe Bacchetta

    (UNIL - Université de Lausanne = University of Lausanne, Swiss Finance Institute [Geneva] - Swiss Finance Institute, CEPR - Center for Economic Policy Research)

  • Romain Rancière

    (CEPR - Center for Economic Policy Research, IMF - International Monetary Fund - International Monetary Fund (IMF))

  • Kenneth Rogoff

    (Havard University - Havard University, NBER - The National Bureau of Economic Research)

Abstract

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.

Suggested Citation

  • Philippe Aghion & Philippe Bacchetta & Romain Rancière & Kenneth Rogoff, 2009. "Exchange rate volatility and productivity growth: The role of financial development," Post-Print halshs-00754377, HAL.
    • Handle: RePEc:hal:journl:halshs-00754377
    DOI: 10.1016/j.jmoneco.2009.03.015
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    Keywords

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models

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