Beyond Competitive Devaluations: The Monetary Dimensions of Comparative Advantage
Paul R. Bergin
- American Economic Journal: Macroeconomics (Forthcoming)
Motivated by the long-standing debate on 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 with two tradable sectors in each country: one perfectly competitive, the
other producing differentiated goods under monopolistic competition subject to sunk entry
costs and nominal rigidities, and hence more sensitive to macroeconomic uncertainty.
Monetary policy can disproportionately foster competitiveness of differentiated goods
firms, ultimately affecting the composition of domestic output and exports.
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