The Real Exchange Rate, Innovation and Productivity: Regional Heterogeneity, Asymmetries and Hysteresis

77 Pages Posted: 1 Dec 2017 Last revised: 30 May 2019

See all articles by Laura Alfaro

Laura Alfaro

Harvard University

Alejandro Cuñat Cuñat

University of Vienna

Harald Fadinger

University of Mannheim

Yanping Liu

University of Mannheim

Multiple version iconThere are 3 versions of this paper

Date Written: May 22, 2019

Abstract

We evaluate manufacturing firms' responses to changes in the real exchange rate (RER) using detailed firm-level data for a large set of countries for the period 2001-2010. We uncover the following stylized facts: In export-oriented emerging Asia, real depreciations are associated with faster growth of firm-level productivity, higher sales and cash-flow, and higher probabilities to engage in R&D and export. We find negative effects for firms in other emerging economies, which are relatively more import dependent, and no significant effects for firms in industrialized economies. Motivated by these facts, we build a dynamic model in which real depreciations raise the cost of importing intermediates, affect demand, borrowing-constraints and the profitability of engaging in innovation (R&D). We decompose the effects of RER changes on productivity growth across regions into these channels. We estimate the model and quantitatively evaluate the different mechanisms by providing counterfactual simulations of temporary RER movements and conduct several robustness analyses. Effects on physical TFP growth, while different across regions, are non-linear and asymmetric.

Keywords: Real Exchange Rate, Firm Level Data, Innovation, Productivity, Exporting, Importing, Credit Constraints

JEL Classification: F, O

Suggested Citation

Alfaro, Laura and Cuñat, Alejandro and Fadinger, Harald and Liu, Yanping, The Real Exchange Rate, Innovation and Productivity: Regional Heterogeneity, Asymmetries and Hysteresis (May 22, 2019). Harvard Business School BGIE Unit Working Paper No. 18-044. Available at SSRN: https://ssrn.com/abstract=3079553 or http://dx.doi.org/10.2139/ssrn.3079553

Laura Alfaro (Contact Author)

Harvard University ( email )

Cambridge, MA 02138
United States

Alejandro Cuñat

University of Vienna ( email )

Bruenner Strasse 72
Vienna, Vienna 1090
Austria

Harald Fadinger

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

Yanping Liu

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

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