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

55 Pages Posted: 6 Oct 2006  

Philippe Aghion

College de France and London School of Economics and Political Science, Fellow; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Philippe Bacchetta

University of Lausanne; Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne; Centre for Economic Policy Research (CEPR)

Romain G. Rancière

Paris School of Economics (PSE); International Monetary Fund (IMF)

Kenneth Rogoff

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: May 8, 2006

Abstract

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 effect 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 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. 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.

Keywords: exchange rate regime, financial development, growth

JEL Classification: E44, F33,F43, O42

Suggested Citation

Aghion, Philippe and Bacchetta, Philippe and Rancière, Romain G. and Rogoff, Kenneth, Exchange Rate Volatility and Productivity Growth: The Role of Financial Development (May 8, 2006). Swiss Finance Institute Research Paper No. 06-16. Available at SSRN: https://ssrn.com/abstract=935247 or http://dx.doi.org/10.2139/ssrn.935247

Philippe Aghion

College de France and London School of Economics and Political Science, Fellow ( email )

London
United Kingdom

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Philippe Bacchetta (Contact Author)

University of Lausanne ( email )

Faculty of Business and Economics
Internef 523
1015 Lausanne
Switzerland

HOME PAGE: http://www.hec.unil.ch/pbacchetta/

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Romain G. Rancière

Paris School of Economics (PSE) ( email )

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Kenneth S. Rogoff

Harvard University - Department of Economics ( email )

Littauer Center
Room 232
Cambridge, MA 02138
United States
617-495-4022 (Phone)
617-495-7730 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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