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

  • Benhima Kenza

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://www.hec.unil.ch/deep/textes/10.09.pdf
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Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 10.09.

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Length: 31 pages + tables and figures
Date of creation: Aug 2010
Date of revision:
Publication status: Published in Open Economies Review, 23(3), July 2012, pp. 501-529
Handle: RePEc:lau:crdeep:10.09
Contact details of provider: Postal:
Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne

Phone: ++41 21 692.33.20
Web page: http://www.hec.unil.ch/deep/publications/cahiers/series
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