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

Laura Alfaro (), Alejandro Cunat, Harald Fadinger and Yanping Liu

No 12943, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 TFP, higher sales and cash-flow, and higher probabilities to engage in R&D and to 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: exporting; Financial constraints; Firm-Level Data; importing; Innovation; productivity; real exchange rate (search for similar items in EconPapers)
JEL-codes: F12 F14 F31 F41 F43 F47 F63 L16 L52 O14 O24 O33 (search for similar items in EconPapers)
Date: 2018-05
New Economics Papers: this item is included in nep-ino and nep-sea
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Related works:
Working Paper: The Real Exchange Rate, Innovation and Productivity: Regional Heterogeneity, Asymmetries and Hysteresis (2019)
Working Paper: The real exchange rate, innovation and productivity: regional heterogeneity, asymmetries and hysteresis (2018)
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