Dessislava Slavtcheva

PhD Candidate in Economics

 “Financial Development, Exchange Rate Regimes, and Productivity Growth”   (Job Market Paper)

 

Abstract:

 

This paper provides a microfounded, quantitative model that rationalizes recent empirical evidence by Aghion et al (2006), who find that fixed exchange rate regimes lead to higher long-run productivity growth in countries with low financial development, while the effect in financially developed countries is insignificant. The channel that explains this evidence in my model is the following: A fixed exchange rate regime leads to lower inflation when the money growth is otherwise high. In turn, lower inflation results in higher long-run productivity growth since financial intermediaries hold a fraction of deposits as reserves, whose return is lower than the market rate and, thus, is affected by inflation. The lower return paid on reserves drives a wedge between the return paid on deposits and the return paid on loans by reducing the former and increasing the latter. In turn, this reduces entry of new innovators in the economy and, consequently, productivity growth. I show that the negative effect of flexible exchange rate regimes on growth is larger for countries with lower levels of financial development because inflation and the fraction of deposits held as reserves are higher in these countries.

 

“Business Cycles, Exchange Rate Regimes, and Productivity Growth”

 

“Financial Development, Exchange Rate Regimes, and Productivity Growth: An Empirical Investigation”

Boston College

Department of Economics