Exchange Rate Volatility and Productivity Growth: the Role of Liability Dollarization

This paper studies how liability dollarization conditions the effectof exchange rate exibility on growth. It develops a model with creditconstrainedrms facing liquidity shocks denominated in tradables while theirrevenues are both in tradable and nontradables. With frictions in the reallocationbetween tradables and nontradables, a peg is more growth-enhancing than aoat in countries with dollarized debt because it stabilizes rms' cash ows andtherefore allows them to face liquidity shock and complete their innovation process.However, this relative advantage diminishes when dollarization decreases.These theoretical predictions are conrmed by an empirical analysis on a panelof 76 countries spanning 1995-2004: the higher the degree of dollarization, themore negative the impact of exchange rate exibility on growth. The empiricalresults are robust to various specications and to the treatment of endogeneity.[...]