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Discussion Paper Details

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

Author(s): Laura Alfaro, Alejandro Cu�at, Harald Fadinger and Yanping Liu

Publication Date: May 2018

Keyword(s): exporting, Financial constraints, Firm-Level Data, importing, Innovation, productivity and real exchange rate

Programme Area(s): Development Economics, Industrial Organization, International Macroeconomics and Finance, International Trade and Regional Economics and Macroeconomics and Growth

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 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 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 export demand, borrowing-constraints and the profitability of engaging in innovation (R&D). We decompose the effects of RER changes on firm-level 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.

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Bibliographic Reference

Alfaro, L, Cu�at, A, Fadinger, H and Liu, Y. 2018. 'The Real Exchange Rate, Innovation and Productivity: Heterogeneity, Asymmetries and Hysteresis'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12943