Learning by Devaluating: A Supply-Side Effect of Competitive Devaluation

Juha Tervala

No 67, Discussion Papers from Aboa Centre for Economics

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.

Keywords: Beggar-thyself; beggar-thy-neighbour; competitive devaluation; learning by doing; open economy macroeconomics (search for similar items in EconPapers)
JEL-codes: E52 F30 F41 F44 (search for similar items in EconPapers)
Pages: 34
Date: 2011-09
New Economics Papers: this item is included in nep-cba, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Learning by devaluating: A supply-side effect of competitive devaluation (2013)
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