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

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 depen...

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Bibliographic Details
Published in:Journal of monetary economics 2009-05, Vol.56 (4), p.494-513
Main Authors: Aghion, Philippe, Bacchetta, Philippe, Rancière, Romain, Rogoff, Kenneth
Format: Article
Language:English
Subjects:
Bond markets
Credit market
Economic activity
Economic development
Economic models
Economics and Finance
Exchange rate regime
Exchange rate regime Financial development and growth
Exchange rates
Financial development and growth
Financial economics
Financial systems
Foreign exchange rates
Growth models
Humanities and Social Sciences
Productivity
Productivity growth
Studies
Uncertainty
Volatility
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Summary: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.
ISSN:0304-3932
1873-1295
DOI:10.1016/j.jmoneco.2009.03.015