Is Exchange Rate Stabilization an Appropriate Cure for the Dutch Disease?

Author/Editor:

Juan Pablo Medina Guzman ; Ruy Lama

Publication Date:

August 1, 2010

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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. 10/182

Subject:

English

Publication Date:

August 1, 2010

ISBN/ISSN:

9781455202164/1018-5941

Stock No:

WPIEA2010182

Format:

Paper

Pages:

43

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