- Exchange Rate Volatility and Productivity Growth: The Role of Financial Development
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- by Rogoff, Kenneth S.; Aghion, Philippe; Bacchetta, Philippe; Ranciere, Romain
- This paper offers empirical evidence that real exchange rate volatility can have a significant impact
on 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.
- Publication Type: WCFIA Working Paper
- Published Date: March 2006
- Field of Interest: International Economics
- Rogoff, Kenneth S., Philippe Aghion; Philippe Bacchetta, and Romain Ranciere. "Exchange Rate Volatility and Productivity Growth: The Role of Financial Development." Working Paper 2008-0109, Weatherhead Center for International Affairs, Harvard University, May 2006.
- Also NBER Working Paper 12117.