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The Real Exchange Rate, Mercantilism and the Learning by Doing Externality

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  • Joshua Aizenman
  • Jaewoo Lee

Abstract

This 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 Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13853.

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Date of creation: Mar 2008
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Publication status: published as REAL EXCHANGE RATE, MERCANTILISM AND THE LEARNING BY DOING EXTERNALITY Joshua Aizenman1, Jaewoo Lee2,* Article first published online: 16 JUL 2010 DOI: 10.1111/j.1468-0106.2010.00505.x © 2010 The Authors. Journal compilation © 2010 Blackwell Publishing Asia Pty Ltd Issue Pacific Economic Review Pacific Economic Review Volume 15, Issue 3, pages 324–335, August 2010
Handle: RePEc:nbr:nberwo:13853

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  1. Arvind Subramanian & Jonathan David Ostry & Simon Johnson, 2007. "The Prospects for Sustained Growth in Africa," IMF Working Papers 07/52, International Monetary Fund.
  2. Steve Ambler & Emanuela Cardia & Jeannine Farazli, 1994. "Export Promotion, Learning by Doing and Growth," Cahiers de recherche CREFE / CREFE Working Papers, CREFE, Université du Québec à Montréal 27, CREFE, Université du Québec à Montréal, revised Jul 1996.
  3. Eswar S. Prasad & Raghuram G. Rajan & Arvind Subramanian, 2007. "Foreign Capital and Economic Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(1), pages 153-230.
  4. Alwyn Young, 1991. "Learning by Doing and the Dynamic Effects of International Trade," NBER Working Papers 3577, National Bureau of Economic Research, Inc.
  5. Aizenman, Joshua & Lee, Jaewoo, 2007. "Financial versus Monetary Mercantilism-Long-run View of Large International Reserves Hoarding," Santa Cruz Department of Economics, Working Paper Series qt5r95t1xf, Department of Economics, UC Santa Cruz.
  6. Joshua Aizenman & Daniel Riera-Crichton, 2006. "Real Exchange Rate and International Reserves in the Era of Growing Financial and Trade Integration," NBER Working Papers 12363, National Bureau of Economic Research, Inc.
  7. Leahy, Dermot & Neary, J Peter, 1999. "Learning by Doing, Precommitment and Infant-Industry Promotion," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 66(2), pages 447-74, April.
  8. Young, Alwyn, 1991. "Learning by Doing and the Dynamic Effects of International Trade," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(2), pages 369-405, May.
  9. Jaewoo Lee & Joshua Aizenman, 2006. "Financial Versus Monetary Mercantilism," IMF Working Papers 06/280, International Monetary Fund.
  10. Simon Johnson & Jonathan D. Ostry & Arvind Subramanian, 2007. "The Prospects for Sustained Growth in Africa: Benchmarking the Constraints," NBER Working Papers 13120, National Bureau of Economic Research, Inc.
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Cited by:
  1. Kappler, Marcus & Reisen, Helmut & Schularick, Moritz & Turkisch, Edouard, 2011. "The macroeconomic effects of large exchange rate appreciations," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 11-016, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. Mbaye, Samba, 2012. "Currency Undervaluation and Growth: Is there a Productivity Channel?," MPRA Paper 44261, University Library of Munich, Germany.
  3. repec:dgr:uvatin:2011126 is not listed on IDEAS
  4. Laura Alfaro & Sebnem Kalemli-Ozcan & Vadym Volosovych, 2011. "Sovereigns, Upstream Capital Flows and Global Imbalances," Tinbergen Institute Discussion Papers 11-126/2, Tinbergen Institute.
  5. Samba MBAYE, 2012. "Real Exchange Rate Undervaluation and Growth: Is there a Total Factor Productivity Growth Channel?," Working Papers 201211, CERDI.
  6. Mai Dao & Ruo Chen, 2011. "The Real Exchange Rate and Employment in China," IMF Working Papers 11/148, International Monetary Fund.

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