The real exchange rate, innovation and productivity: regional heterogeneity, asymmetries and hysteresis

Laura Alfaro, Alejandro Cunat, Yanping Liu and Harald Fadinger

No 18-05, Working Papers from University of Mannheim, Department of Economics

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: real exchange rate; innovation; productivity; exporting; importing; financial constraints; firm-level data (search for similar items in EconPapers)
JEL-codes: F O (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-cfn, nep-eff, nep-opm and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

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Related works:
Working Paper: The Real Exchange Rate, Innovation and Productivity: Regional Heterogeneity, Asymmetries and Hysteresis (2019)
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