The Real Exchange Rate, Innovation and Productivity

72 Pages Posted: 1 Dec 2017 Last revised: 17 Apr 2020

See all articles by Laura Alfaro

Laura Alfaro

Harvard University

Alejandro 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: April 8, 2020


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 about regional variation of manufacturing firms' integration into global value chains: firms in emerging Asia are very export oriented relative to their dependence on imported intermediates; firms from Latin America and Eastern Europe depend heavily on imported intermediates compared to their export orientation; firms from high-income countries export on average as much as they import. Motivated by these facts, we build a dynamic model in which real depreciations raise the cost of importing intermediates, affect export demand, borrowing-constraints and the profitability of engaging in innovation (R&D). We decompose the effects of RER changes on average firm-level productivity growth across regions into these channels. We then structurally estimate the model and quantitatively evaluate the different mechanisms by providing counterfactual simulations of temporary RER movements. In export-oriented emerging Asia, real depreciations are on average associated with higher firm-level probabilities to engage in R&D, faster growth of firm-level productivity and cash-ow and higher export entry rates. We find negative average effects for firms in other emerging economies, which are relatively more import dependent, and no significant average effects for firms in industrialized economies. Effects on physical TFP growth, while different across regions, are non-linear and asymmetric.

Keywords: Real exchange rate, innovation, productivity, exporting, importing, financial constraints, firm-level data

JEL Classification: F, O

Suggested Citation

Alfaro, Laura and Cuñat, Alejandro and Fadinger, Harald and Liu, Yanping, The Real Exchange Rate, Innovation and Productivity (April 8, 2020). Harvard Business School BGIE Unit Working Paper No. 18-044, Available at SSRN: or

Laura Alfaro (Contact Author)

Harvard University ( email )

Cambridge, MA 02138
United States

Alejandro Cuñat

University of Vienna ( email )

Bruenner Strasse 72
Vienna, Vienna 1090

Harald Fadinger

University of Mannheim ( email )

Department of Economics
L7 3-5
Mannheim, 68131

Yanping Liu

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Mannheim, 68131

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