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Commodity currency reactions and the Dutch disease: the role of capital controls

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  • Kai Chen

    (University of California)

  • Dongwon Lee

    (University of California)

Abstract

Commodity booms generally induce real exchange rate appreciation in commodity-rich economies and make other tradable sectors less competitive. This “Dutch disease” phenomenon has been blamed for leading to structures of production with low diversification and undermining sustainable growth. In this paper, we explore whether capital controls can mitigate the transmission of commodity price changes to the real exchange rate and shield manufactured exports. Examining a panel of 37 commodity-abundant countries over the period 1980–2020, we find that a steeper commodity currency appreciation indeed has a more detrimental impact on manufactured exports. Restrictions on capital flows tend to reduce real appreciation pressures and the severity of the Dutch disease. Countercyclical capital controls seem to help foster economic diversification in commodity-dependent developing countries.

Suggested Citation

  • Kai Chen & Dongwon Lee, 2023. "Commodity currency reactions and the Dutch disease: the role of capital controls," Empirical Economics, Springer, vol. 65(5), pages 2065-2089, November.
    • Handle: RePEc:spr:empeco:v:65:y:2023:i:5:d:10.1007_s00181-023-02423-9
    DOI: 10.1007/s00181-023-02423-9
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    More about this item

    Keywords

    Capital controls; Commodity price; Dutch disease; Manufactured exports; Real exchange rate;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F3 - International Economics - - International Finance
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products

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