Essays on Economic Growth, Financial Integration and Exchange Rates

This dissertation analyzes how the degree of financial integration and the exchange rate regime of a country affect its economic growth. The discussion is focused on developing countries, with special emphasis on Latin America, and it contributes to the recent economic growth and development literatures. The first paper analyzes how fiscal policy and credit constraints affect the impact of macroeconomic volatility on long-run growth. A tractable theoretical model is examined where agents engage in two types of investment: a short-run investment in physical capital and a long-run investment in R&D. The main implication is that in countries with lower degree of financial development, countercyclical fiscal policy is particularly important in reducing the negative consequences of adverse aggregate shocks on firms' long-run investments. The empirical analysis confirms the theoretical predictions from the model.The second paper examines the relationship between exchange rate regimes, the degree of international financial integration and economic growth. The main implication of the theoretical model is that a more flexible exchange rate can reduce average growth, especially in countries with low level of domestic financial development and low degrees of international financial integration. The empirical analysis confirms the predictions from the model. This paper has policy implications, since it suggests that the exchange rate regime needs to be considered in the light of the development of domestic credit markets and the degree of international financial integration of a country.The third paper examines the political economy of exchange rate policy in Latin America by analyzing a model in which special interest groups and policymakers interact to determine the exchange rate regime and its level. The main implication is that the optimal exchange rate is determined by economic parameters, the distribution of special interest groups in the economy, and their capacity to influence policymakers. The empirical analysis for Latin America for the period 1975-2006 confirms the predictions of the model, and establishes that political economy factors have played a role in shaping exchange rate policy; both its regime and its level.