Discussion paper

DP16611 Currency Volatility and Global Technological Innovation

We investigate the real effects of foreign exchange (FX) volatility on technological innovation. Using a 32-market, three-decade sample, we show that heightened FX volatility associates with significantly lower firm-level R&D expenditures, patents granted, and forward citations. The negative FX volatility-innovation relation can be attributed to precautionary savings needs and trade slowdown. The relationship is stronger for firms with financial constraints, with the use of foreign debt, and in more open economies; it is weaker for firms with derivatives hedging, with higher sales, and in countries with better financial development. We also use FX regime changes and the collapse of the European Exchange Rate Mechanism to support a causal interpretation


Hsu, P, M Taylor, Z Wang and Q Xu (2021), ‘DP16611 Currency Volatility and Global Technological Innovation‘, CEPR Discussion Paper No. 16611. CEPR Press, Paris & London. https://cepr.org/publications/dp16611