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 TFP, higher sales and cash-flow, and higher probabilities to engage in R&D and to export. We find negative effects for firms in other emerging economies, which are relatively more import dependent, and no significant e↵ects for firms in industrialized economies. Motivated by these facts, we build a dynamic model in which real depreciations raise the cost of importing intermediates, a↵ect demand, borrowing constraints and the profitability of engaging in innovation (R&D). We decompose the e↵ects of RER changes on productivity growth across regions into these channels. We estimate the model and quantitatively evaluate the di↵erent 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.
Host: Inga Heiland