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.
This paper uses yearly panel data on OECD countries to analyze the relationship between growth and the cyclicality of government debt. We develop new time-varying estimates of the cyclicality of public debt. Our main findings can be summarized as follows: (i) less procyclical public debt growth can have significantly positive effects on productivity growth, in particular when financial development is lower; (ii) public debt growth has become increasingly countercyclical in most OECD countries over the past twenty years, but this trend has been less pronounced in the EMU; (iii) less financially developed or more open economies display less countercyclical public debt growth.
2007_8_aghion.pdfWCFIA Working Paper 07-08, June 2006
Can a country grow faster by saving more? We address this question both theoretically and empirically. In our model, growth results from innovations that allow local sectors to catch up with the frontier technology. In relatively poor countries, catching up with the frontier requires the involvement of a foreign investor, who is familiar with the frontier technology, together with effort on the part of a local bank, who can directly monitor local projects to which the technology must be adapted. In such a country, local saving matters for innovation, and therefore growth, because it allows the domestic bank to cofinance projects and thus to attract foreign investment. But in countries close to the frontier, local firms are familiar with the frontier technology, and therefore do not need to attract foreign investment to undertake an innovation project, so local saving does not matter for growth. In our empirical exploration we show that lagged savings is significantly associated with productivity growth for poor but not for rich countries. This effect operates entirely through TFP rather than through capital accumulation. Further, we show that savings is significantly associated with higher levels of FDI inflows and equipment imports and that the effect that these have on growth is significantly larger for poor countries than rich.
2007_7_aghion.pdfWCFIA Working Paper 07-07, August 2006