Learning by Devaluating: A Supply-Side Effect of Competitive Devaluation
Abstract
This study shows that the learning by doing (LBD) effect has substantial, both quantitative and qualitative, consequences for the international transmission of monetary policy. LDB implies that a country can increase its productivity-increasing skill level, at the expense of the neighbour, by competitive devaluation engineered through low interest rates. If measured by the cumulative change in output after 12 quarters, LBD increases the harmful effect of competitive devaluation on foreign output by 85Ð125%, when compared to the case without it. If LBD is sufficiently strong and the cross-country substitutability is high (low), it reverses the effect of monetary policy on foreign (domestic) welfare into negative (positive). Moreover, a combination of a high crosscountry substitutability and a sufficiently strong LDB effect implies that competitive devaluation increases both domestic output and welfare, at the expense of foreign output and welfare.Download Info
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Paper provided by Aboa Centre for Economics in its series Discussion Papers with number 67.
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Length: 34
Date of creation: Sep 2011
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Handle: RePEc:tkk:dpaper:dp67
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Keywords: Beggar-thyself; beggar-thy-neighbour; competitive devaluation; learning by doing; open economy macroeconomics;Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- F30 - International Economics - - International Finance - - - General
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-10-01 (All new papers)
- NEP-CBA-2011-10-01 (Central Banking)
- NEP-MAC-2011-10-01 (Macroeconomics)
- NEP-OPM-2011-10-01 (Open MacroEconomics)
References
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Economics Papers
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- John Bluedorn & Christopher Bowdler, 2006. "The Open Economy Consequences of U.S. Monetary Policy," Economics Series Working Papers 265, University of Oxford, Department of Economics.
- Yongsung Chang & Joao Gomes & Frank Schorfheide, 2002.
"Learning by Doing as a Propagation Mechanism,"
Macroeconomics
0204002, EconWPA.
- Yongsung Chang & Joao F. Gomes & Frank Schorfheide, 2002. "Learning-by-Doing as a Propagation Mechanism," American Economic Review, American Economic Association, vol. 92(5), pages 1498-1520, December.
- Chang, Yongsung & Gomes, Joao F & Schorfheide, Frank, 2002. "Learning by Doing as a Propagation Mechanism," CEPR Discussion Papers 3599, C.E.P.R. Discussion Papers.
- Juha Tervala, 2011. "International Welfare Effects of Monetary Policy," Discussion Papers 66, Aboa Centre for Economics.
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