Learning by Devaluating: A Supply-Side Effect of Competitive Devaluation

Tervala, Juha

doi:10.2139/ssrn.1930716

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Learning by Devaluating: A Supply-Side Effect of Competitive Devaluation

34 Pages Posted: 20 Sep 2011 Last revised: 15 Dec 2011

See all articles by Juha Tervala

Juha Tervala

affiliation not provided to SSRN

Date Written: December 2011

Abstract

This study shows that the learning by doing (LBD) effect has substantial, both quantitative and qualitative, consequences for the international transmission of monetary policy. LDB implies that a country can increase its productivity-increasing skill level, at the expense of the neighbor, by competitive devaluation engineered through low interest rates. If measured by the cumulative change in output after 12 quarters, LBD increases the harmful effect of competitive devaluation on foreign output by 85–125%, when compared to the case without it. If LBD is sufficiently strong and the cross-country substitutability is high (low), it reverses the effect of monetary policy on foreign (domestic) welfare into negative (positive). Moreover, a combination of a high cross-country substitutability and a sufficiently strong LDB effect implies that competitive devaluation increases both domestic output and welfare, at the expense of foreign output and welfare.

Keywords: beggar-thyself, beggar-thy-neighbour, competitive devaluation, learning by doing, open economy macroeconomics

JEL Classification: E52, F30, F41, F44

Suggested Citation: Suggested Citation

Tervala, Juha, Learning by Devaluating: A Supply-Side Effect of Competitive Devaluation (December 2011). Available at SSRN: https://ssrn.com/abstract=1930716 or http://dx.doi.org/10.2139/ssrn.1930716