Events at CERGE-EI

Thursday, 10 October, 2019 | 14:00 | Macro Research Seminar

Prof. Harald Fadinger (U. of Mannheim, Germany) “The Real Exchange Rate, Innovation and Productivity”

Prof. Harald Fadinger

The University of Mannheim, Germany

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Authors: Laura Alfaro, Harald Fadinger, Alejandro Cuñat, and 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: In export-oriented emerging Asia, real depreciations are associated with faster growth of firm-level productivity, higher sales and cash-flow, and higher probabilities to engage in R&D and 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.

JEL Codes: F, O.

Key Words: real exchange rate, innovation, productivity, exporting, importing, financial constraints, firm-level data

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Full Text: “The Real Exchange Rate, Innovation and Productivity”