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  3. American Economic Journal: Macroeconomics
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  5. Real Exchange Rates and Endogenous Productivity

American Economic Journal:
Macroeconomics

ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)

Real Exchange Rates and Endogenous Productivity

  • Nils Gornemann
  • Pablo A. Guerrón Quintana
  • Felipe Saffie
American Economic Journal: Macroeconomics (Forthcoming)

Abstract

Two-thirds of the real exchange rate’s (RER) volatility occurs at low frequencies. We provide empirical evidence that links movements in the RER to changes in research and development spending and patents. A two-country real business cycle model with endogenous productivity and a gradual dissemination of ideas can rationalize these facts. Endogenous productivity alters RER dynamics by inducing (1) a persistent gap in productivity between countries and (2) a reallocation of resources towards research and development spending. The estimated full model effortlessly replicates the dynamic properties of the RER at all horizons without sacrificing the model’s fit along other dimensions.

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