Currency Undervaluation and Comparative Advantage / Paul Bergin.

By:

Bergin, Paul

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w29699.Publication details: Cambridge, Mass. National Bureau of Economic Research 2022.Description: 1 online resource: illustrations (black and white)Subject(s):

F41 - Open Economy Macroeconomics

Online resources:

Available additional physical forms:

Hardcopy version available to institutional subscribers

Abstract: This paper highlights a tradeoff implied by a policy of export-led growth through currency undervaluation. While undervaluation can foster domestic manufacturing in countries like China by sustaining trade surplus, it also can harm a country's comparative advantage by altering the composition of exports. Undervaluation may discourage specializing in high-value added manufacturing and instead favor specialization in non-differentiated goods with higher price elasticity. A dynamic general equilibrium model of two traded good sectors and capital account restrictions shows that undervaluation can either raise or lower welfare depending on two competing effects on comparative advantage: agglomeration versus an elasticity effect.

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January 2022.

This paper highlights a tradeoff implied by a policy of export-led growth through currency undervaluation. While undervaluation can foster domestic manufacturing in countries like China by sustaining trade surplus, it also can harm a country's comparative advantage by altering the composition of exports. Undervaluation may discourage specializing in high-value added manufacturing and instead favor specialization in non-differentiated goods with higher price elasticity. A dynamic general equilibrium model of two traded good sectors and capital account restrictions shows that undervaluation can either raise or lower welfare depending on two competing effects on comparative advantage: agglomeration versus an elasticity effect.