NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Beyond Competitive Devaluations: The Monetary Dimensions of Comparative Advantage

Paul R. Bergin, Giancarlo Corsetti

NBER Working Paper No. 25765
Issued in April 2019
NBER Program(s):The International Finance and Macroeconomics Program

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.

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Document Object Identifier (DOI): 10.3386/w25765

 
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