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When And Why Worry About Real Exchange Rate Appreciation? The Missing Link Between Dutch Disease And Growth

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  • NICOLÁS MAGUD

    ()
    (International Monetary Fund, USA)

  • SEBASTIÁN SOSA

    ()
    (International Monetary Fund, USA)

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    Abstract

    We review the literature on Dutch disease, and document that shocks that trigger foreign exchange inflows (such as natural resource booms, surges in foreign aid, remittances, or capital inflows) appreciate the real exchange rate, generate factor reallocation, and reduce manufacturing output and net exports. We also observe that real exchange rate misalignment due to overvaluation and higher volatility of the real exchange rate lower growth. Regarding the effect of undervaluation of the exchange rate on economic growth, the evidence is mixed and inconclusive. However, there is no evidence in the literature that Dutch disease reduces overall economic growth. Policy responses should aim at adequately managing the boom and the risks associated with it.

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    Bibliographic Info

    Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal Journal of International Commerce, Economics and Policy.

    Volume (Year): 04 (2013)
    Issue (Month): 02 ()
    Pages: 1350009-1-1350009-27

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    Handle: RePEc:wsi:jicepx:v:04:y:2013:i:02:p:1350009-1-1350009-27

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    Related research

    Keywords: Dutch disease; real exchange rate; growth; F24; F31; F35; F43;

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    References

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