Working Paper: NBER ID: w24633
Authors: Laura Alfaro; Alejandro Cunat; Harald Fadinger; 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 about regional variation of manufacturing firms' integration into global value chains: firms in emerging Asia are very export oriented relative to their dependence on imported intermediates; firms from Latin America and Eastern Europe depend heavily on imported intermediates compared to their export orientation; firms from high-income countries export on average as much as they import. 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 average firm-level productivity growth across regions into these channels. We then structurally estimate the model and quantitatively evaluate the different mechanisms by providing counterfactual simulations of temporary RER movements. In export-oriented emerging Asia, real depreciations are on average 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 average effects for firms in other emerging economies, which are relatively more import dependent, and no significant average effects for firms in industrialized economies. 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: F01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Real depreciations (E31) | Probability of firms engaging in R&D (O32) |
| Probability of firms engaging in R&D (O32) | Firm-level productivity growth (O49) |
| Real depreciations (E31) | Firm-level productivity growth (O49) |
| Real depreciations (E31) | Cash flow (G19) |
| Cash flow (G19) | Firm-level productivity growth (O49) |
| Real depreciations (E31) | Negative average effects on productivity and innovation outcomes (for firms reliant on imports) (F14) |
| Real depreciations (E31) | Increased costs of imported intermediates (F69) |
| Increased costs of imported intermediates (F69) | Negative average effects on productivity and innovation outcomes (for firms reliant on imports) (F14) |
| RER changes (R11) | Significant average effects on firms in industrialized economies (F69) |