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

Abstract

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).