Unintended Consequences of U. S. Monetary Policy Shocks: Dutch Disease and Capital Flow Measures in Emerging Markets and Developing Economies
IMF Working Papers, August 6, 2021
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- Unintended Consequences of U. S. Monetary Policy Shocks: Dutch Disease and Capital Flow Measures in Emerging Markets and Developing Economies
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Bibliographic details
- Authors: Juan Yepez
- Published: August 6, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513589749.001
Abstract and Scope
- Author: Juan Yepez
- Date: August 6, 2021
- Sample and period: 25 EMDEs from 2000-17
- Pages: 32
- Volume: 2021
- Issue: 209
- Series: Working Paper No. 2021/209
- DOI: https://doi.org/10.5089/9781513589749.001
- Stock No: WPIEA2021209
- ISBN: 9781513589749
- ISSN: 1018-5941
Key findings
- Dutch disease definition: large and sustained foreign currency inflows lead to a contraction of the tradable sector by giving rise to a real appreciation of the home currency.
- Empirical evidence:
- U. S. monetary policy shocks coincided with episodes of currency appreciation in the sample of 25 EMDEs from 2000-17.
- U. S. monetary policy shocks coincided with contractions in tradable output in these economies.
- The use of capital flow measures (CFMs) has been a common policy response in several EMDEs to U.S. monetary policy shocks.
- The paper documents that surges in capital inflows driven by accommodative U. S. monetary policy have been associated with a Dutch disease syndrome in many EMDEs.
Model and theoretical contributions
- Model structure:
- A two sector small open economy model augmented with a learning-by-doing (LBD) mechanism in the tradable sector is presented to rationalize the empirical findings.
- Welfare analysis:
- Provides a rationale for the use of CFMs as a second-best policy when agents do not internalize the LBD externality arising from costly resource misallocation due to greater capital inflows.
- Implementation challenges:
- Adequate calibration of CFMs represents an important challenge.
- Quantification of the LBD externality represents an important challenge.
Policy implications and recommendations
- CFMs can be justified as a second-best policy tool to mitigate adverse reallocations and preserve long-term tradable-sector learning-by-doing benefits when private agents ignore LBD externalities.
- Policymakers face two critical implementation tasks:
- Calibrating CFMs appropriately to balance short-term capital flow management and long-term tradable-sector learning.
- Quantifying the magnitude of the LBD externality to inform policy design.
IMF Working Papers — Unintended Consequences of U. S. Monetary Policy Shocks: Dutch Disease and Capital Flow Measures in Emerging Markets and Developing Economies, By Juan Yepez, August 6, 2021.
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