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Fiscal Policy and Dutch Disease

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  • Frederick Van der Ploeg

Abstract

In this paper we revisit the Dutch disease paying particular attention to the role of specific factors of production and capital stock dynamics. The main insight is that if the natural resource rich windfall is substantial but not large enough for the country to become a rentier, capital goods must be produced at home and adjustment to natural resource windfall takes time. It takes time to build this home-grown capital. Specific factors are crucial to explain the dynamic responses of the real exchange rate, capital intensities and wages in response to a natural resource windfall. If a country is small and the windfall is large, it may be able to import capital and migrant labour in which case the Dutch disease can be avoided.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2011/wp-cesifo-2011-03/cesifo1_wp3398.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3398.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3398

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Keywords: specific factors; real exchange rate; capital stock dynamics; factor intensity; international trade; Dutch disease; permanent income; fiscal policy rules; overlapping generations;

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  1. Boschini, Anne & Pettersson, Jan & Roine, Jesper, 2003. "Resource curse or not: A question of appropriability," Working Paper Series in Economics and Finance 534, Stockholm School of Economics.
  2. Frederick Van der Ploeg & Anthony J. Venables, 2009. "Harnessing Windfall Revenues: Optimal Policies for Resource-Rich Developing Economies," CESifo Working Paper Series 2571, CESifo Group Munich.
  3. Christa N. Brunnschweiler & Erwin H. Bulte, 2006. "The Resource Curse Revisited and Revised: A Tale of Paradoxes and Red Herrings," CER-ETH Economics working paper series 06/61, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  4. P J Forsyth & J A Kay, 1980. "The economic implications of North Sea Oil Revenues," Fiscal Studies, Institute for Fiscal Studies, vol. 1(3), pages 1-28, July.
  5. Torvik, Ragnar, 2001. "Learning by doing and the Dutch disease," European Economic Review, Elsevier, vol. 45(2), pages 285-306, February.
  6. Syrquin, M. & Chenery, H.B., 1989. "Patterns Of Development, 1950 To 1983," World Bank - Discussion Papers 41, World Bank.
  7. Paul Collier & Rick Van Der Ploeg & Michael Spence & Anthony J Venables, 2010. "Managing Resource Revenues in Developing Economies," IMF Staff Papers, Palgrave Macmillan, vol. 57(1), pages 84-118, April.
  8. Mahbub Morshed, A. K. M. & Turnovsky, Stephen J., 2004. "Sectoral adjustment costs and real exchange rate dynamics in a two-sector dependent economy," Journal of International Economics, Elsevier, vol. 63(1), pages 147-177, May.
  9. Frederick van der Ploeg & Steven Poelhekke, 2009. "The pungent smell of Red Herrings; Subsoil assets, rents, volatility and the resource curse," DNB Working Papers 233, Netherlands Central Bank, Research Department.
  10. Kareem Ismail, 2010. "The Structural Manifestation of the `Dutch Disease’," IMF Working Papers 10/103, International Monetary Fund.
  11. Krugman, Paul, 1987. "The narrow moving band, the Dutch disease, and the competitive consequences of Mrs. Thatcher : Notes on trade in the presence of dynamic scale economies," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 41-55, October.
  12. van Wijnbergen, Sweder J G, 1984. "The 'Dutch Disease': A Disease after All?," Economic Journal, Royal Economic Society, vol. 94(373), pages 41-55, March.
  13. Neary, J Peter & Purvis, Douglas D, 1982. " Sectoral Shocks in a Dependent Economy: Long-run Adjustment and Short-run Accommodation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 84(2), pages 229-53.
  14. Flemming, John S, 1982. " Comment on J. P. Neary and D. D. Purvis, "Sectoral Shocks in a Dependent Economy: Long-run Adjustment and Short-run Accommodation."," Scandinavian Journal of Economics, Wiley Blackwell, vol. 84(2), pages 255-57.
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Cited by:
  1. Lucas Bretschger & Simone Valente, 2011. "International economics and natural resources: from theory to policy," International Economics and Economic Policy, Springer, vol. 8(2), pages 115-120, June.
  2. Beine, Michel & Bos, Charles S. & Coulombe, Serge, 2012. "Does the Canadian economy suffer from Dutch disease?," Resource and Energy Economics, Elsevier, vol. 34(4), pages 468-492.

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