Currency undervaluation and comparative advantage

Paul Bergin

European Economic Review, 2022, vol. 150, issue C

Abstract: This paper highlights a tradeoff implied by a policy of export-led growth through currency undervaluation. While undervaluation can foster domestic manufacturing in countries like China by sustaining trade surplus, it also can harm a country's comparative advantage by altering the composition of exports. Undervaluation may discourage specializing in high-value added manufacturing and instead favor specialization in non-differentiated goods with higher price elasticity. A dynamic general equilibrium model of two traded good sectors and capital account restrictions shows that undervaluation can either raise or lower welfare depending on two competing effects on comparative advantage: an elasticity effect versus an agglomeration effect working through firm entry and roundabout production.

Keywords: Currency undervaluation; Reserves accumulation; Comparative advantage; Production delocation; Firm dynamics (search for similar items in EconPapers)
JEL-codes: F41 (search for similar items in EconPapers)
Date: 2022
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Working Paper: Currency Undervaluation and Comparative Advantage (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:150:y:2022:i:c:s0014292122001969

DOI: 10.1016/j.euroecorev.2022.104316

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