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

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Author Info
Emmanuel K. K. Lartey

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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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File URL: http://www.blackwell-synergy.com/links/doi/10.1111/j.1467-9396.2008.00762.x
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Publisher Info
Article provided by Blackwell Publishing 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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  1. Christian Saborowski, 2009. "Capital Inflows and the Real Exchange Rate: Can Financial Development Cure the Dutch Disease?," IMF Working Papers 09/20, International Monetary Fund. [Downloadable!]
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This page was last updated on 2009-11-22.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.