The Real Exchange Rate, Mercantilism and the Learning by Doing Externality
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.
|Date of creation:||Mar 2008|
|Date of revision:|
|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|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jaewoo Lee & Joshua Aizenman, 2006.
"Financial Versus Monetary Mercantilism: Long-Run View of Large International Reserves Hoarding,"
IMF Working Papers
06/280, International Monetary Fund.
- Joshua Aizenman & Jaewoo Lee, 2008. "Financial versus Monetary Mercantilism: Long-run View of Large International Reserves Hoarding," The World Economy, Wiley Blackwell, vol. 31(5), pages 593-611, 05.
- 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.
- Joshua Aizenman & Jaewoo Lee, 2006. "Financial Versus Monetary Mercantilism-Long-run View of Large International Reserves Hoarding," NBER Working Papers 12718, National Bureau of Economic Research, Inc.
- Steve Ambler & Emanuela Cardia & Jeannine Farazli, 1994.
"Export Promotion, Learning by Doing and Growth,"
Cahiers de recherche CREFE / CREFE Working Papers
27, CREFE, Université du Québec à Montréal, revised Jul 1996.
- Prasad, Eswar & Rajan, Raghuram G. & Subramanian, Arvind, 2007.
"Foreign Capital and Economic Growth,"
IZA Discussion Papers
3186, Institute for the Study of Labor (IZA).
- Arvind Subramanian & Jonathan David Ostry & Simon Johnson, 2007.
"The Prospects for Sustained Growth in Africa: Benchmarking the Constraints,"
IMF Working Papers
07/52, International Monetary Fund.
- 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.
- Dermot Leahy & J. Peter Neary, 1999. "Learning by Doing, Precommitment and Infant-Industry Promotion," Review of Economic Studies, Oxford University Press, vol. 66(2), pages 447-474.
- repec:oup:restud:v:66:y:1999:i:2:p:447-74 is not listed on IDEAS
- Alwyn Young, 1991. "Learning by Doing and the Dynamic Effects of International Trade," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 369-405.
- Alwyn Young, 1991. "Learning by Doing and the Dynamic Effects of International Trade," NBER Working Papers 3577, National Bureau of Economic Research, Inc.
- 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.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:13853. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.