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Beyond Competitive Devaluations: The Monetary Dimensions of Comparative Advantage

Paul Bergin and Giancarlo Corsetti ()

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: Motivated by the long-standing debate on the pros and cons of competitive devaluation, we propose a new perspective on how monetary and exchange rate policies can contribute to a country’s international competitiveness. We refocus the analysis on the implications of monetary stabilization for a country’s comparative advantage. We develop a two-country New-Keynesian model allowing for sectoral differences in the production of tradables in each economy: while in one sector firms are perfectly competitive, in another sector firms produce differentiated goods under monopolistic competition and subject to nominal rigidities, hence their performance is more sensitive to macroeconomic uncertainty. We show that, by stabilizing inflation and the output gap, monetary policy can foster the competitiveness of these firms, encouraging investment and entry in the differentiated goods sector, and ultimately affecting the composition of domestic output and exports. Welfare implications of alternative monetary policy rules that shift comparative advantage are found to be substantial in a calibrated version of the model.

Keywords: monetary policy; production location externality; firm entry; optimal tariff (search for similar items in EconPapers)
JEL-codes: F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-opm
Date: 2015-07-08
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Related works:
Working Paper: Beyond Competitive Devaluations: The Monetary Dimensions of Comparative Advantage (2019) Downloads
Working Paper: Beyond Competitive Devaluations: The Monetary Dimensions of Comparative Advantage (2015) Downloads
Working Paper: Beyond Competitive Devaluations: The Monetary Dimensions of Comparative Advantage (2015) Downloads
Working Paper: Beyond competitive devaluations:The monetary dimensions of comparative advantage (2015) Downloads
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