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

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  • Laura Alfaro
  • Alejandro Cuñat
  • Harald Fadinger
  • Yanping Liu

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 about regional variation of manufacturing firms' integration into global value chains: firms in emerging Asia are very export oriented relative to their dependence on imported intermediates; firms from Latin America and Eastern Europe depend heavily on imported intermediates compared to their export orientation; firms from high-income countries export on average as much as they import. Motivated by these facts, we build a dynamic model in which real depreciations raise the cost of importing intermediates, affect export demand, borrowing-constraints and the profitability of engaging in innovation (R&D). We decompose the effects of RER changes on average firm-level productivity growth across regions into these channels. We then structurally estimate the model and quantitatively evaluate the different mechanisms by providing counterfactual simulations of temporary RER movements. In export-oriented emerging Asia, real depreciations are on average associated with higher firm-level probabilities to engage in R&D, faster growth of firm-level productivity and cash-flow and higher export entry rates. We find negative average effects for firms in other emerging economies, which are relatively more import dependent, and no significant average effects for firms in industrialized economies. Effects on physical TFP growth, while different across regions, are non-linear and asymmetric.

Suggested Citation

  • Laura Alfaro & Alejandro Cuñat & Harald Fadinger & Yanping Liu, 2018. "The Real Exchange Rate, Innovation and Productivity: Heterogeneity, Asymmetries and Hysteresis," NBER Working Papers 24633, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:24633
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    Cited by:

    1. Donna, Javier D., 2018. "Measuring Long-Run Price Elasticities in Urban Travel Demand," MPRA Paper 90260, University Library of Munich, Germany.
    2. Nils Goernemann & Pablo Guerron-Quintana & Felipe Saffie, 2020. "Exchange Rates and Endogenous Productivity," International Finance Discussion Papers 1301, Board of Governors of the Federal Reserve System (U.S.).
    3. Alfaro, Laura & Asis, Gonzalo & Chari, Anusha & Panizza, Ugo, 2019. "Corporate debt, firm size and financial fragility in emerging markets," Journal of International Economics, Elsevier, vol. 118(C), pages 1-19.
    4. Rodnyansky, A., 2018. "(Un)Competitive Devaluations and Firm Dynamics," Cambridge Working Papers in Economics 1888, Faculty of Economics, University of Cambridge.

    More about this item

    JEL classification:

    • F0 - International Economics - - General
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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