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Real Exchange Rates and Endogenous Productivity

Author

Listed:
  • Nils Gornemann
  • Pablo A. Guerrón Quintana
  • Felipe Saffie

Abstract

Two-thirds of the real exchange rate's (RER's) volatility occurs at low frequencies. We provide empirical evidence that links movements in the RER to changes in research and development spending and patents. A two-country real business cycle model with endogenous productivity and a gradual dissemination of ideas can rationalize these facts. Endogenous productivity alters RER dynamics by inducing (i) a persistent gap in productivity between countries and (ii) a reallocation of resources toward research and development spending. The estimated full model effortlessly replicates the dynamic properties of the RER at all horizons without sacrificing the model's fit along other dimensions.

Suggested Citation

  • Nils Gornemann & Pablo A. Guerrón Quintana & Felipe Saffie, 2025. "Real Exchange Rates and Endogenous Productivity," American Economic Journal: Macroeconomics, American Economic Association, vol. 17(4), pages 204-261, October.
    • Handle: RePEc:aea:aejmac:v:17:y:2025:i:4:p:204-61
    DOI: 10.1257/mac.20210445
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    More about this item

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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