Is Exchange Rate Stabilization an Appropriate Cure for the Dutch Disease?
August 1, 2010
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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.
Subject: Commodity prices, Consumption, Dutch disease, Exchange rates, Real exchange rates
Keywords: learning by doing, WP
Pages:
43
Volume:
2010
DOI:
Issue:
182
Series:
Working Paper No. 2010/182
Stock No:
WPIEA2010182
ISBN:
9781455202164
ISSN:
1018-5941
