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Commodity Booms, Dutch Disease, and Real Business Cycles in a Small Economy: The Case of Coffe in Colombia

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Rodrigo Suescún M.

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Abstract

This paper proposes a dynamic,stochastic, multisector growth model which integrates the real business cycle literature and booming sector and Dutch Disease economics to analyze fluctuations, resource allocation and relative price changes in small open (developing) economies subject to terms of trade shocks. The model is consistent whith aggregate and sectorial cyclical behavior of this class of economies, and rationalizes as an efficient outcome the symptoms of Dutch Disease (temporary deindustrialization and appreciation of the real exchange rate) which are sometimes judged to be suboptimal responses and as the rationale for government intervention in developing countries. It is also found that commodity price stabilization policies do not significantly affect the cyclical pattern of fluctuations and that their welfare benefits are second orden.

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Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 073.

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Handle: RePEc:bdr:borrec:073

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  1. Kamas, Linda, 1986. "Dutch disease economics and the Colombian export boom," World Development, Elsevier, vol. 14(9), pages 1177-1198, September. [Downloadable!] (restricted)
  2. Angus Deaton & Guy Laroque, 1990. "On The Behavior of Commodity Prices," NBER Working Papers 3439, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Mendoza, Enrique G, 1995. "The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 101-37, February. [Downloadable!] (restricted)
  4. Edwards, Sebastian & van Wijnbergen, Sweder, 1989. "Disequilibrium and structural adjustment," Handbook of Development Economics, in: Hollis Chenery† & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 2, chapter 28, pages 1481-1533 Elsevier. [Downloadable!] (restricted)
  5. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September. [Downloadable!] (restricted)
  6. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, vol. 84(1), pages 84-103, March. [Downloadable!] (restricted)
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  7. Alan C. Stockman & Linda L. Tesar, 1991. "Tastes and technology in a two-country model of the business cycle: explaining international co-movements," Working Paper 9019, Federal Reserve Bank of Cleveland. [Downloadable!]
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  8. David K. Backus & Patrick J. Kehoe, 1992. "International Evidence on the Historical Properties of Business Cycles," Working Papers 92-5, New York University, Leonard N. Stern School of Business, Department of Economics.
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  9. Correia, Isabel & Neves, Joao C. & Rebelo, Sergio, 1995. "Business cycles in a small open economy," European Economic Review, Elsevier, vol. 39(6), pages 1089-1113, June. [Downloadable!] (restricted)
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  10. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-48, September. [Downloadable!] (restricted)
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  11. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November. [Downloadable!] (restricted)
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  12. Prescott, Edward C & Mehra, Rajnish, 1980. "Recursive Competitive Equilibrium: The Case of Homogeneous Households," Econometrica, Econometric Society, vol. 48(6), pages 1365-79, September. [Downloadable!] (restricted)
  13. Jonathan David Ostry & Carmen Reinhart & Masao Ogaki, 1995. "Saving Behavior in Low- and Middle -Income Developing Countries: A Comparison," IMF Working Papers 95/3, International Monetary Fund.
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  14. Greenwood, J. & Huffman, G., 1991. "Tax Analysis in A Real Business Cycle Model: On Measuring Harberger Triangles and Okun Gaps," UWO Department of Economics Working Papers 9103, University of Western Ontario, Department of Economics.
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  15. Tesar, Linda L., 1995. "Evaluating the gains from international risksharing," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 42(1), pages 95-143, June. [Downloadable!] (restricted)
  16. Cardia, Emanuela, 1991. "The dynamics of a small open economy in response to monetary, fiscal, and productivity shocks," Journal of Monetary Economics, Elsevier, vol. 28(3), pages 411-434, December. [Downloadable!] (restricted)
  17. Corden, W M, 1984. "Booming Sector and Dutch Disease Economics: Survey and Consolidation," Oxford Economic Papers, Oxford University Press, vol. 36(3), pages 359-80, November. [Downloadable!] (restricted)
  18. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232. [Downloadable!] (restricted)
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