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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. Liliana Varela & Juliana Salomao, 2016. "Exchange Rate Exposure and Firm Dynamics," Working Papers 2016-278-05, Department of Economics, University of Houston.
    2. Fabrice Defever & Alejandro Riano, 2017. "Twin peaks," Discussion Papers 2017-15, University of Nottingham, GEP.

    More about this item

    Keywords

    real exchange rate; firm level data; innovation; productivity; exporting; importing; credit constraints; financial constraints;

    JEL classification:

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

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