The real exchange rate, mercantilism and the learning by doing externality

Description

"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"--National Bureau of Economic Research web site.

Subjects

Series Statement

• NBER working paper series -- working paper 13853
• Working paper series (National Bureau of Economic Research : Online) -- working paper no. 13853.

Links

• http://papers.nber.org/papers/w13853
• URL