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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 (LBD) externality calls for an undervalued exchange rate. We obtain mixed results. For an economy where the LBD externality operates in the traded sector, real exchange rate undervaluation may be used to internalize this externality, if the LBD calls for subsidizing employment in the traded sector. 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.

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  • Joshua Aizenman & Jaewoo Lee, 2010. "Real Exchange Rate, Mercantilism And The Learning By Doing Externality," Pacific Economic Review, Wiley Blackwell, vol. 15(3), pages 324-335, August.
    • Handle: RePEc:bla:pacecr:v:15:y:2010:i:3:p:324-335
    DOI: 10.1111/j.1468-0106.2010.00505.x
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    References listed on IDEAS

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    More about this item

    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

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