This paper presents empirical evidence that real exchange rate volatility significantly affects long-term productivity growth, but the effect depends on a country's level of financial development. For countries with low financial development, exchange rate volatility generally reduces growth, while for financially advanced countries, there is no significant effect. The analysis uses data from 83 countries spanning 1960-2000 and finds robust results across different measures of financial development and exchange rate volatility. A monetary growth model is also developed, showing that real exchange rate uncertainty exacerbates the negative investment effects of domestic credit market constraints. The paper contrasts with existing literature that finds small or insignificant effects of exchange rate volatility on real activity. The results suggest that financial development plays a crucial role in determining the optimal exchange rate regime for long-run productivity growth. The findings are robust to various tests, including alternative classifications of exchange rate regimes and control variables. The paper also shows that exchange rate flexibility can have a negative impact on productivity growth in less financially developed economies, even though it dampens the impact of real shocks. The results highlight the importance of financial development in shaping exchange rate regimes and their effects on productivity growth.This paper presents empirical evidence that real exchange rate volatility significantly affects long-term productivity growth, but the effect depends on a country's level of financial development. For countries with low financial development, exchange rate volatility generally reduces growth, while for financially advanced countries, there is no significant effect. The analysis uses data from 83 countries spanning 1960-2000 and finds robust results across different measures of financial development and exchange rate volatility. A monetary growth model is also developed, showing that real exchange rate uncertainty exacerbates the negative investment effects of domestic credit market constraints. The paper contrasts with existing literature that finds small or insignificant effects of exchange rate volatility on real activity. The results suggest that financial development plays a crucial role in determining the optimal exchange rate regime for long-run productivity growth. The findings are robust to various tests, including alternative classifications of exchange rate regimes and control variables. The paper also shows that exchange rate flexibility can have a negative impact on productivity growth in less financially developed economies, even though it dampens the impact of real shocks. The results highlight the importance of financial development in shaping exchange rate regimes and their effects on productivity growth.