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

Philippe Aghion, Philippe Bacchetta, Romain Ranciere, Kenneth Rogoff

NBER Working Paper No. 12117
Issued in May 2006
NBER Program(s):   EFG   IFM   ME

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 83country 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.

download in pdf format
   (904 K)

email paper

This paper is available as PDF (904 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w12117

Published: Aghion, Philippe & Bacchetta, Philippe & Rancière, Romain & Rogoff, Kenneth, 2009. "Exchange rate volatility and productivity growth: The role of financial development," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 494-513, May. citation courtesy of

Users who downloaded this paper also downloaded these:
Andersen, Bollerslev, Diebold, and Labys w6961 The Distribution of Exchange Rate Volatility
Ito, Isard, and Symansky Economic Growth and Real Exchange Rate: An Overview of the Balassa-Samuelson Hypothesis in Asia
Razin and Collins w6174 Real Exchange Rate Misalignments and Growth
Ito, Isard, and Symansky w5979 Economic Growth and Real Exchange Rate: An Overview of the Balassa-Samuelson Hypothesis in Asia
Reinhart and Rogoff w8963 The Modern History of Exchange Rate Arrangements: A Reinterpretation
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us