TY  - JOUR
AU  - Aizenman,Joshua
AU  - Lee,Jaewoo
TI  - The Real Exchange Rate, Mercantilism and the Learning by Doing Externality
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13853
PY  - 2008
Y2  - March 2008
UR  - http://www.nber.org/papers/w13853
L1  - http://www.nber.org/papers/w13853.pdf
N1  - Author contact info:
Joshua Aizenman
Department of Economics;  E2
1156 High St.
University of California, Santa Cruz
Santa Cruz, CA  95064
Tel: 831/459-4791
Fax: 831/459-5077
E-Mail: jaizen@ucsc.edu

Jaewoo Lee
Research Department
International Monetary Fund
Washington DC, 20431
E-Mail: jlee3@imf.org
AB  - This paper examines the degree to which the learning by doing externality [LBD] calls for an undervalued exchange rate, a policy suggested by recent empirical studies which concluded that mildly undervalued real exchange rate may enhance growth. We obtain mixed results. For an economy where LBD externality operates in the traded sector, real exchange rate undervaluation may be used in order to internalize this externality, if the LBD calls for subsidizing employment in the traded sector. Yet, we also find that these results are not robust to changes in the nature of the LBD externality. 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. In addition, a deliberate undervaluation by means of hoarding reserves may backfire if the needed sterilization would increase the cost of investment in the traded sector.
ER  -