Exchange Rate Volatility and Productivity Growth: The Role of Liability Dollarization

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Type
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Publications
Institution
Title
Exchange Rate Volatility and Productivity Growth: The Role of Liability Dollarization
Journal
Open Economies Review
Author(s)
Benhima K.
ISSN
1573-708X (Online)
0923-7992 (Print)
Publication state
Published
Issued date
07/2012
Peer-reviewed
Oui
Volume
23
Number
3
Pages
501-529
Language
english
Abstract
This paper studies how liability dollarization conditions the effect of exchange rate flexibility on growth. It develops a model with credit-constrained firms facing liquidity shocks denominated in tradables while their revenues are both in tradable and nontradables. With frictions in the reallocation between tradables and nontradables, a peg is more growth-enhancing than a float in countries with dollarized debt because it stabilizes firms' cash flows and therefore allows them to face liquidity shock and complete their innovation process. However, this relative advantage diminishes when dollarization decreases. These theoretical predictions are confirmed by an empirical analysis on a panel of 76 countries spanning 1995-2004: the higher the degree of dollarization, the more negative the impact of exchange rate flexibility on growth. The empirical results are robust to various specifications and to the treatment of endogeneity.
Keywords
Exchange rates, Financial development, Growth, Liability dollarization
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Create date
22/08/2011 15:06
Last modification date
20/08/2019 13:59
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