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The Real Exchange Rate, Innovation and Asymmetries and Hysteresis

Author

Listed:
  • Laura Alfaro

    (Harvard Business School, Business, Government and the International Economy Unit)

  • Alejandro Cuñat

    (University of Vienna)

  • Harald Fadinger

    (University of Mannheim)

  • Yanping Liu

    (University of Mannheim)

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-ow, 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.

Suggested Citation

  • Laura Alfaro & Alejandro Cuñat & Harald Fadinger & Yanping Liu, 2017. "The Real Exchange Rate, Innovation and Asymmetries and Hysteresis," Harvard Business School Working Papers 18-044, Harvard Business School, revised May 2018.
  • Handle: RePEc:hbs:wpaper:18-044
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    References listed on IDEAS

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    Cited by:

    1. Ha, Jongrim & Marc Stocker, M. & Yilmazkuday, Hakan, 2020. "Inflation and exchange rate pass-through," Journal of International Money and Finance, Elsevier, vol. 105(C).
    2. Juliana Salomao & Liliana Varela, 2022. "Exchange Rate Exposure and Firm Dynamics [Credit Constraints and the Cyclicality of R&D Investment: Evidence from France]," Review of Economic Studies, Oxford University Press, vol. 89(1), pages 481-514.
    3. Felipe Benguria & Felipe Saffie & Hidehiko Matsumoto, 2019. "Productivity and Trade Dynamics in Sudden Stops," 2019 Meeting Papers 1378, Society for Economic Dynamics.
    4. Fabrice Defever & Alejandro Riano, 2017. "Twin peaks," Discussion Papers 2017-15, University of Nottingham, GEP.
    5. Fabrice Defever & Alejandro Riano, 2017. "Twin peaks," Discussion Papers 2017-15, University of Nottingham, GEP.
    6. Nils Gornemann & Pablo Guerrón-Quintana & Felipe Saffie, 2020. "Exchange Rates and Endogenous Productivity," International Finance Discussion Papers 1301, Board of Governors of the Federal Reserve System (U.S.).

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    Keywords

    real exchange rate; firm level data; innovation; productivity; exporting; importing; credit constraints; financial constraints;
    All these keywords.

    JEL classification:

    • F - International Economics
    • O - Economic Development, Innovation, Technological Change, and Growth

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