The Real Exchange Rate, Mercantilism and the Learning by Doing Externality
AbstractThis paper examines the degree to which the learning by doing externality [LBD] calls for an undervalued exchange rate, a policy suggested by recent empirical studies which concluded that mildly undervalued real exchange rate may enhance growth. We obtain mixed results. For an economy where LBD externality operates in the traded sector, real exchange rate undervaluation may be used in order to internalize this externality, if the LBD calls for subsidizing employment in the traded sector. Yet, we also find that these results are not robust to changes in the nature of the LBD externality. If the LBD externality is embodied in aggregate investment, the optimal policy calls for subsidizing the cost of capital in the traded sector, and there is no room for undervalued exchange rate policy. In addition, a deliberate undervaluation by means of hoarding reserves may backfire if the needed sterilization would increase the cost of investment in the traded sector.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13853.
Date of creation: Mar 2008
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Find related papers by JEL classification:
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
- F15 - International Economics - - Trade - - - Economic Integration
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-03-25 (All new papers)
- NEP-CBA-2008-03-25 (Central Banking)
- NEP-IFN-2008-03-25 (International Finance)
- NEP-OPM-2008-03-25 (Open Economy Macroeconomic)
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