Currency Undervaluation and Comparative Advantage

Paul Bergin

No 29699, NBER Working Papers from National Bureau of Economic Research, Inc

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: agglomeration versus an elasticity effect.

JEL-codes: F41 (search for similar items in EconPapers)
Date: 2022-01
New Economics Papers: this item is included in nep-dge, nep-int and nep-opm
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Published as Paul R. Bergin, 2022. "Currency Undervaluation and Comparative Advantage," European Economic Review, .

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Journal Article: Currency undervaluation and comparative advantage (2022)
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