Thesis advisor: Fabio Ghironi / My doctoral dissertation studies the interaction between financial development, exchange rate regimes and productivity growth. The first chapter provides a microfounded, quantitative model that rationalizes recent empirical evidence by Aghion et al (2009), 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. In the second chapter, I perform panel-data analysis to find how much of the effect of exchange rate regimes on productivity growth, documented previously by Aghion et al. (2009), can be accounted for by the channel proposed in the first chapter of my dissertation. I use data for 83 countries over the period 1960-2000. The data comes from the Penn World Table, World Development Indicators, International Financial Statistics, and the Reinhart and Rogoff classification of exchange rate regimes. I use the GMM system estimator and regress productivity growth on financial development, a variable describing the exchange rate regime, growth controls, as well as bank reserve ratios. I find that when the interaction effect of inflation and financial development or the interaction of the reserve ratio and financial development are added to the regression used by Aghion et al. (2009), the exchange rate regime effect on productivity growth in less financially developed countries is no longer significant. This implies that the channel proposed in the first chapter of my dissertation can explain most of the initial empirical results. The third chapter explores the short-run effect of exchange rate regimes on the macroeconomic performance of a small open economy with endogenous productivity growth and underdeveloped financial markets when the home economy is subject to shocks. I use the model introduced in the first chapter, add nominal price rigidities, and calculate impulse responses, given a productivity shock and a shock to the foreign nominal interest rate. I also calculate second moments implied by the model and compare them to empirical second moments. The results show that after a positive exogenous productivity shock, productivity growth, output and consumption increase more under the flexible exchange rate regime. However, given an increase in the foreign nominal interest rate, productivity growth falls but the reduction in productivity growth is smaller under the fixed exchange rate regime. In addition, output and consumption fall after the shock, however, the reduction of consumption and output is higher under the fixed exchange rate regime. I also find that after both shocks analyzed here, welfare is higher under the fixed exchange rate regime. The model is also able to match some features of business cycles in developing countries. / Thesis (PhD) — Boston College, 2011. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.
| Identifer | oai:union.ndltd.org:BOSTON/oai:dlib.bc.edu:bc-ir_101996 |
| Date | January 2011 |
| Creators | Slavtcheva, Dessislava |
| Publisher | Boston College |
| Source Sets | Boston College |
| Language | English |
| Detected Language | English |
| Type | Text, thesis |
| Format | electronic, application/pdf |
| Rights | Copyright is held by the author, with all rights reserved, unless otherwise noted. |
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