The Real Exchange Rate, Mercantilism and the Learning by Doing Externality

Joshua Aizenman, Jaewoo Lee

NBER Working Paper No. 13853
Issued in March 2008
NBER Program(s):International Trade and Investment

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.

download in pdf format
   (121 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w13853

Published: REAL EXCHANGE RATE, MERCANTILISM AND THE LEARNING BY DOING EXTERNALITY Joshua Aizenman1, Jaewoo Lee2,* Article first published online: 16 JUL 2010 DOI: 10.1111/j.1468-0106.2010.00505.x © 2010 The Authors. Journal compilation © 2010 Blackwell Publishing Asia Pty Ltd Issue Pacific Economic Review Pacific Economic Review Volume 15, Issue 3, pages 324–335, August 2010 citation courtesy of

Users who downloaded this paper also downloaded* these:
Aizenman and Lee w12718 Financial Versus Monetary Mercantilism-Long-run View of Large International Reserves Hoarding
Aizenman and Glick w13902 Sterilization, Monetary Policy, and Global Financial Integration
Ito, Isard, and Symansky Economic Growth and Real Exchange Rate: An Overview of the Balassa-Samuelson Hypothesis in Asia
Aizenman w13277 Large Hoarding of International Reserves and the Emerging Global Economic Architecture
Aizenman w12734 International Reserves Management and the Current Account
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us