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REAL EXCHANGE RATE, MERCANTILISM AND THE LEARNING BY DOING EXTERNALITY
Author(s) -
Aizenman Joshua,
Lee Jaewoo
Publication year - 2010
Publication title -
pacific economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.34
H-Index - 33
eISSN - 1468-0106
pISSN - 1361-374X
DOI - 10.1111/j.1468-0106.2010.00505.x
Subject(s) - externality , economics , subsidy , exchange rate , investment (military) , monetary economics , microeconomics , capital (architecture) , market economy , archaeology , politics , political science , law , history
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.