{
  "title": "Foreign Exchange Intervention and the Dutch Disease",
  "publication": "IMF Working Papers, March 27, 2017",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2017/03/27/foreign-exchange-intervention-and-the-dutch-disease-44767",
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  "summary": "We study the optimal foreign exchange (FX) intervention policy in response to a positive terms of trade shock and associated Dutch disease episode in a small open economy model.",
  "sections": [
    {
      "heading": "Research question and model",
      "content": "- Studies the optimal foreign exchange (FX) intervention policy in response to a positive terms of trade shock and associated Dutch disease episode in a small open economy model.\n- Incorporates learning-by-doing (LBD) externalities to assess social optimality of production allocations."
    },
    {
      "heading": "Key findings",
      "content": "- During a Dutch disease episode tradable production drops below the socially optimal level, resulting in lower welfare under learning-by-doing (LBD) externalities.\n- FX reserves accumulation improves welfare by:\n  - preventing a large appreciation of the real exchange rate, and\n  - inducing an efficient reallocation between the tradable and non-tradable sectors.\n- For an empirically plausible parametrization of LBD externalities, the model predicts that in response to a 10 percent increase in commodity prices FX reserves should increase by 1.5 percent of GDP.\n- The welfare gains from optimally using FX reserves are twice as high as the gains from relying only on monetary policy."
    },
    {
      "heading": "Policy implications",
      "content": "- FX intervention is a beneficial policy to counteract the loss of competitiveness during a Dutch disease episode.\n- Optimal FX reserves accumulation can be more effective than monetary policy alone in preserving tradable-sector activity and overall welfare.\n\n---\n\n Content in this bundle\n\n- Foreign Exchange Intervention and the Dutch Disease\n  - Foreign Exchange Intervention and the Dutch Disease (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Foreign Exchange Intervention and the Dutch Disease (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2017/03/27/foreign-exchange-intervention-and-the-dutch-disease-44767"
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    "Authors: Julia Faltermeier, Ruy Lama, Juan Pablo Medina",
    "Published: March 27, 2017",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781475589238.001",
    "Studies the optimal foreign exchange (FX) intervention policy in response to a positive terms of trade shock and associated Dutch disease episode in a small open economy model.",
    "Incorporates learning-by-doing (LBD) externalities to assess social optimality of production allocations.",
    "During a Dutch disease episode tradable production drops below the socially optimal level, resulting in lower welfare under learning-by-doing (LBD) externalities.",
    "FX reserves accumulation improves welfare by:",
    "For an empirically plausible parametrization of LBD externalities, the model predicts that in response to a 10 percent increase in commodity prices FX reserves should increase by 1.5 percent of GDP.",
    "The welfare gains from optimally using FX reserves are twice as high as the gains from relying only on monetary policy.",
    "FX intervention is a beneficial policy to counteract the loss of competitiveness during a Dutch disease episode.",
    "Optimal FX reserves accumulation can be more effective than monetary policy alone in preserving tradable-sector activity and overall welfare.",
    "**Foreign Exchange Intervention and the Dutch Disease**"
  ],
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