TY - JOUR AU - Aghion,Philippe AU - Bacchetta,Philippe AU - Ranciere,Romain AU - Rogoff,Kenneth TI - Exchange Rate Volatility and Productivity Growth: The Role of Financial Development JF - National Bureau of Economic Research Working Paper Series VL - No. 12117 PY - 2006 Y2 - May 2006 UR - http://www.nber.org/papers/w12117 L1 - http://www.nber.org/papers/w12117.pdf N1 - Author contact info: Philippe Aghion Department of Economics Harvard University 1805 Cambridge St Cambridge, MA 02138 Tel: 617/495-6675 Fax: 617/495-4341 E-Mail: paghion@fas.harvard.edu Philippe Bacchetta Faculty of Business and Economics University of Lausanne Extranef CH-1015 Lausanne Switzerland E-Mail: philippe.bacchetta@unil.ch Romain Ranciere International Monetary Fund Research Department, 9-612 700 19th Street NW Washington, DC 20431 Tel: 202 6238675 E-Mail: romainranciere@gmail.com Kenneth S. Rogoff Thomas D Cabot Professor of Public Policy Economics Department Harvard University Littauer Center 216 Cambridge, MA 02138-3001 Tel: 617-495-4022 Fax: 617/495-7730 E-Mail: krogoff@harvard.edu AB - 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%u2019s 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. ER -