Learning by devaluating: A supply-side effect of competitive devaluation

This study shows that the learning-by-doing (LBD) effect has substantial consequences for the international transmission of a monetary policy. LDB implies that a country can increase its productivity-increasing skill level by competitive devaluation, which happens at the expense of the neighbour if the Marshall-Lerner condition is satisfied. 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%. If LBD is sufficiently strong and the cross-country substitutability is high (low), the effect of the monetary policy on foreign (domestic) welfare reverses to negative (positive). (C) 2012 Elsevier Inc. All rights reserved.