The Real Exchange Rate, Innovation and Productivity: Heterogeneity, Asymmetries and Hysteresis
SeriesInternational Trade and Development Workshops
Speaker(s)Harald Fadinger (University of Mannheim, Germany)
LocationErasmus University, Sanders Building, Room 0.07
Date and time
March 05, 2020
15:00 - 16:00
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.