{
  "title": "Is Exchange Rate Stabilization an Appropriate Cure for the Dutch Disease?",
  "publication": "IMF Working Papers, August 1, 2010",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/is-exchange-rate-stabilization-an-appropriate-cure-for-the-dutch-disease-24122",
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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.",
  "sections": [
    {
      "heading": "Summary",
      "content": "- This paper evaluates how successful is a policy of exchange rate stabilization to counteract the negative effects of a Dutch Disease episode.\n- The authors consider a small open economy model that incorporates nominal rigidities and a learning-by-doing externality in the tradable sector.\n- Principal conclusion: 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.\n- The paper also finds that welfare is a decreasing function of exchange rate intervention.\n- Policy implication stated: stabilizing the nominal exchange rate in response to a Dutch Disease episode is highly distortionary."
    },
    {
      "heading": "Key Findings",
      "content": "- Exchange rate intervention can prevent inefficient loss of tradable output.\n- Exchange rate intervention generates misallocation of resources in non-tradable and other sectors.\n- Welfare is a decreasing function of exchange rate intervention, indicating welfare losses with stronger stabilization."
    },
    {
      "heading": "Model and Mechanisms (as described)",
      "content": "- Framework: small open economy model.\n- Frictions included: nominal rigidities.\n- Externality included: learning-by-doing externality in the tradable sector.\n- Trade-off highlighted: preserving tradable output versus distorting resource allocation elsewhere."
    },
    {
      "heading": "Policy Recommendations and Implications",
      "content": "- Exchange rate stabilization as a response to Dutch Disease episodes is not welfare-improving according to the model results.\n- Policymakers should account for the distortionary effects and welfare-reducing outcomes when considering nominal exchange rate stabilization to counteract Dutch Disease.\n\n---\n\n Content in this bundle\n\n- wp10182\n  - wp10182 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp10182 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/is-exchange-rate-stabilization-an-appropriate-cure-for-the-dutch-disease-24122"
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    "Authors: Juan Pablo Medina Guzman, Ruy Lama",
    "Published: August 1, 2010",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781455202164.001",
    "This paper evaluates how successful is a policy of exchange rate stabilization to counteract the negative effects of a Dutch Disease episode.",
    "The authors consider a small open economy model that incorporates nominal rigidities and a learning-by-doing externality in the tradable sector.",
    "Principal conclusion: 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.",
    "Policy implication stated: stabilizing the nominal exchange rate in response to a Dutch Disease episode is highly distortionary.",
    "Exchange rate intervention can prevent inefficient loss of tradable output.",
    "Exchange rate intervention generates misallocation of resources in non-tradable and other sectors.",
    "Welfare is a decreasing function of exchange rate intervention, indicating welfare losses with stronger stabilization.",
    "Framework: small open economy model.",
    "Frictions included: nominal rigidities.",
    "Externality included: learning-by-doing externality in the tradable sector.",
    "Trade-off highlighted: preserving tradable output versus distorting resource allocation elsewhere.",
    "Exchange rate stabilization as a response to Dutch Disease episodes is not welfare-improving according to the model results.",
    "Policymakers should account for the distortionary effects and welfare-reducing outcomes when considering nominal exchange rate stabilization to counteract Dutch Disease.",
    "**_wp10182**"
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