Working Paper: NBER ID: w29699
Authors: Paul Bergin
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.
Keywords: No keywords provided
JEL Codes: F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| currency undervaluation (F31) | comparative advantage (F11) |
| currency undervaluation (F31) | specialization in differentiated goods (F12) |
| specialization in differentiated goods (F12) | welfare gains (D69) |
| specialization in non-differentiated goods (L19) | greater imports of differentiated goods (F12) |
| greater imports of differentiated goods (F12) | associated trade costs (F19) |
| specialization in non-differentiated goods (L19) | disadvantaged home welfare (I38) |
| currency undervaluation (F31) | specialization in non-differentiated goods (L19) |