Working Paper: CEPR ID: DP12943
Authors: Harald Fadinger; Alejandro Cuat; Laura Alfaro; 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 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.
Keywords: real exchange rate; innovation; productivity; exporting; importing; financial constraints; firm-level data
JEL Codes: F12; F14; F31; F41; F43; F47; F63; L16; L52; O14; O24; O33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| RER changes (R11) | firm-level productivity growth (O49) |
| real depreciations (F31) | higher probabilities for firms to engage in R&D (O31) |
| higher probabilities for firms to engage in R&D (O31) | faster growth in firm-level productivity (O49) |
| RER depreciations (D25) | positive effects on exporters' cash flow (F10) |
| RER depreciations (D25) | negative effects on importers due to increased costs (F69) |
| real depreciation (F31) | increase in average firm-level TFP growth for firms in emerging Asia (O53) |
| real depreciation (F31) | decrease in average firm-level TFP growth for firms in other emerging economies (F69) |
| RER changes (R11) | asymmetric effects on productivity based on trade status (F12) |