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Capital Inflows, Dutch Disease Effects, and Monetary Policy in a Small Open Economy

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  • Emmanuel K. K. Lartey

Abstract

This paper studies the role of monetary policy in a small open economy that experiences Dutch disease effects as a result of capital inflows, and examines the issue of whether such a policy should seek to address these effects from a welfare perspective. I find that Dutch disease effects occur under a fixed nominal exchange rate regime. However, a monetary policy regime characterized by generalized Taylor interest rate rules featuring either the real exchange rate or the nominal exchange rate avert Dutch disease effects. Welfare results reveal that the optimal rule is a generalized Taylor rule consistent with nominal exchange rate flexibility. Copyright � 2008 The Author. Journal compilation � 2008 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 16 (2008)
Issue (Month): 5 (November)
Pages: 971-989

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Handle: RePEc:bla:reviec:v:16:y:2008:i:5:p:971-989

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Citations

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Cited by:
  1. Mohamed Tahar Benkhodja, 2011. "Monetary Policy and the Dutch Disease in a Small Open Oil Exporting Economy," Working Papers halshs-00654511, HAL.
  2. Hubert Gabrisch & Karsten Staehr, 2012. "The Euro Plus Pact: Competitiveness and External Capital Flows in the EU Countries," Working Papers, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies) 324, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies).
  3. Orrego, Fabrizio & Vega, Germán, 2013. "Dutch disease and fiscal policy," Working Papers, Banco Central de Reserva del Perú 2013-021, Banco Central de Reserva del Perú.
  4. Dissou, Yazid, 2010. "Oil price shocks: Sectoral and dynamic adjustments in a small-open developed and oil-exporting economy," Energy Policy, Elsevier, Elsevier, vol. 38(1), pages 562-572, January.
  5. Jean-Louis Combes & Patrick Plane & Tidiane Kinda, 2011. "Capital Flows, Exchange Rate Flexibility, and the Real Exchange Rate," IMF Working Papers 11/9, International Monetary Fund.
  6. Al-mulali, Usama & Che Sab, Normee, 2010. "Oil Shocks and Kuwait’s Dinar Exchange Rate: the Dutch Disease Effect," MPRA Paper 26844, University Library of Munich, Germany.
  7. Christian Saborowski, 2009. "Capital Inflows and the Real Exchange Rate," IMF Working Papers 09/20, International Monetary Fund.
  8. Jair N. OJeda & Julián A. Parra Polanía & Carmiña O. Vargas, 2014. "Natural-Resource Booms, Fiscal Rules and Welfare in a Small Open Economy," Borradores de Economia 807, Banco de la Republica de Colombia.
  9. João Sousa Andrade & António Portugal Duarte, 2013. "The Dutch Disease in the Portuguese Economy," GEMF Working Papers 2013-05, GEMF - Faculdade de Economia, Universidade de Coimbra.
  10. Lartey, Emmanuel K.K., 2012. "Financial openness, nontradable inflation and optimal monetary policy," Economics Letters, Elsevier, Elsevier, vol. 117(3), pages 782-785.
  11. Heng, Dyna, 2011. "Capital flows and real exchange rate: does financial development matter?," MPRA Paper 48553, University Library of Munich, Germany, revised May 2012.
  12. Farid MAKHLOUF & Mazhar MUGHAL, 2011. "Remittances, Dutch Disease, and Competitiveness - A Bayesian Analysis," Working Papers 2011-2012_1, CATT - UPPA - Université de Pau et des Pays de l'Adour, revised Dec 2011.
  13. Menon, Jayant, 2009. "Managing Success in Viet Nam: Macroeconomic Consequences of Large Capital Inflows with Limited Policy Tools," Working Papers on Regional Economic Integration, Asian Development Bank 27, Asian Development Bank.
  14. Ruslan Aliyev, 2012. "Monetary Policy in Resource-Rich Developing Economies," CERGE-EI Working Papers wp466, The Center for Economic Research and Graduate Education - Economic Institute, Prague.

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