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Beyond Competitive Devaluations: The Monetary Dimensions of Comparative Advantage

Author

Listed:
  • Paul Bergin

    (Economics Department University of California-Davis)

  • Giancarlo Corsetti

    (Faculty of Economics University of Cambridge)

Abstract
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 two tradable sectors in each country: while one sector is perfectly competitive, firms in the other sector produce differentiated goods under monopolistic competition subject to sunk entry costs and nominal rigidities, hence their performance is more sensitive to macroeconomic uncertainty. We show that, by stabilizing markups, 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. Panel regressions based on worldwide exports to the U.S. by sector lend empirical support to the theory. Constraining monetary policy with an exchange rate peg lowers a country’s share of differentiated goods in exports between 4 and 12 percent.

Suggested Citation

  • Paul Bergin & Giancarlo Corsetti, 2015. "Beyond Competitive Devaluations: The Monetary Dimensions of Comparative Advantage," Discussion Papers 1516, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:1516
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    References listed on IDEAS

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    More about this item

    Keywords

    Monetary Policy; Production Location Externality; Firm Entry; Optimal Tariff;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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