This paper offers empirical evidence that real exchange rate volatility can have a significant impact on long-term rate of productivity growth, but the effect depends critically on a country's level of financial development. For countries with relatively low levels of financial development, exchange rate volatility generally reduces growth, whereas for financially advanced countries, there is no significant effect. Our empirical analysis is based on an 83 country data set spanning the years 1960-2000; our results appear robust to time window, alternative measures of financial development and exchange rate volatility, and outliers. We also offer a simple monetary growth model in which real exchange rate uncertainty exacerbates the negative investment effects of domestic credit market constraints. Our approach delivers results that are in striking contrast to the vast existing empirical exchange rate literature, which largely finds the effects of exchange rate volatility on real activity to be relatively small and insignificant.

International audienceThe paper studies how high household leverage and crises can be caused by changes in the income distribution. Empirically, the periods 1920-1929 and 1983-2008 both exhibited a large increase in the income share of high-income households, a large increase in debt leverage of low- and middle-income households, and an eventual financial and real crisis. The paper presents a theoretical model where higher leverage and crises are the endogenous result of a growing income share of high-income households. The model matches the profiles of the income distribution, the debt-to-income ratio and crisis risk for the three decades preceding the Great Recession

This paper studies the apparent contradiction between two strands of the literature on the effects of financial intermediation on economic activity. On the one hand, the empirical growth literature finds a positive effect of financial depth as measured by, for instance, private domestic credit and liquid liabilities (e.g., . On the other hand, the banking and currency crisis literature finds that monetary aggregates, such as domestic credit, are among the best predictors of crises and their related economic downturns (e.g., Kaminski and Reinhart 1999). The paper accounts for these contrasting effects based on the distinction between the short-and long-run impacts of financial intermediation. Working with a panel of cross-country and time-series observations, the paper estimates an encompassing model of short-and long-run effects using the Pooled Mean Group estimator developed by Pesaran, Shin, and Smith (1999). The conclusion from this analysis is that a positive long-run relationship between financial intermediation and output growth co-exists with a, mostly, negative short-run relationship. The paper further develops an explanation for these contrasting effects by relating them to recent theoretical models, by linking the estimated short-run effects to measures of financial fragility (namely, banking crises and financial volatility), and by jointly analyzing the effects of financial depth and fragility in classic panel growth regressions.

ere We present a model of the optimal level of international reserves for a small open economy seeking insurance against sudden stops in capital flows. We derive a formula for the optimal level of reserves and show that plausible calibrations can explain reserves of the order of magnitude observed in many emerging market countries. The buildup of reserves in emerging market Asia can be explained only if one assumes a large anticipated output cost of sudden stops and a high level of risk aversion.The recent buildup in international reserves in emerging market countries has revived old debates about the appropriate amount of reserves for an open economy. It has been argued that many emerging market countries accumulated reserves as a form of self-insurance against capital flow volatility, the danger of which was learned the hard way in the international financial crises of the 1990s (Aizenman and Marion, 2003;Stiglitz, 2006). 1 Against this backdrop, there has been surprisingly little work trying to quantify the level of reserves that can be justified as an insurance against capital flow volatility.This article contributes to filling this gap with a model and some calibrations. The model features a representative consumer in a small open economy who may lose access to external credit (a sudden stop). The consumer can smooth domestic consumption in sudden stops by entering insurance contracts with foreign investors, or equivalently, by financing a stock of liquid reserves with contingent debt. The model yields a closedform expression for the welfare-maximising level of reserves. The optimal level of reserves depends in an intuitive way on the probability and the size of the sudden stop, the consumer's risk aversion and the opportunity cost of holding the reserves. We also present various extensions of the basic model, including one in which reserves have benefits in terms of prevention (they reduce the probability of a sudden stop).With our formula in hand, we then explore the quantitative implications of the model by using data on a sample of sudden stops in emerging market countries. Our estimates of the optimal level of reserves are relatively sensitive to parameters that are