Is Exchange Rate Stabilization an Appropriate Cure for the Dutch Disease?
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Summary:
This paper evaluates how successful is a policy of exchange rate stabilization to counteract the negative effects of a Dutch Disease episode. We consider a small open economy model that incorporates nominal rigidities and a learning-by-doing externality in the tradable sector. The paper shows that leaning against an appreciated exchange rate can prevent an inefficient loss of tradable output but at the cost of generating a misallocation of resources in other sectors of the economy. The paper also finds that welfare is a decreasing function of exchange rate intervention. These results suggest that stabilizing the nominal exchange rate in response to a Dutch Disease episode is highly distortionary.
Series:
Working Paper No. 2010/182
Subject:
Commodity prices Consumption Dutch disease Exchange rates Real exchange rates
English
Publication Date:
August 1, 2010
ISBN/ISSN:
9781455202164/1018-5941
Stock No:
WPIEA2010182
Pages:
43
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