Effect of Exchange Rate Volatility on Productivity Growth in Developing Countries While Considering Their Financial Development Levels

Document Type : Research Article



This study examines the role of financial development levels in relationship between exchange rate volatility and productivity growth for 36 developing countries in 1980- 2010 period. Estimation result from dynamic panel method of GMM estimation show that the effect of exchange rate volatility on productivity growth has been negative in countries with low financial development level and positive in countries with higher financial development level. Also there is this effect for economic growth. In other word, exchange rate volatility has negative effect on economic growth in low financial development and positive effect in higher financial development level. Therefore due to unfavorable exchange rate volatility effects in countries with low financial development, movement toward a more flexible exchange rate regime requires further financial market development. Moreover, estimation results for oil exporting countries show that these countries to get riding from negative effects of exchange rate volatility need to financial development more than other developing countries.