Advanced Search
MyIDEAS: Login to save this paper or follow this series

Absorbing A Windfall of Foreign Exchange: Dutch disease dynamics

Contents:

Author Info

  • van der Ploeg, Frederick
  • Venables, Anthony J.

Abstract

The response of an economy to a windfall of foreign exchange (be it aid or natural resource revenues) is often constrained by absorptive capacity. We provide a micro-founded analysis of absorption constraints, based on the idea that expanding the economy’s capital stock (in aggregate or sectorally) requires non-traded inputs, the supply of which is constrained by the initial capital stock. Given this constraint, the economy will manifest ‘Dutch disease’ symptoms, although many of them are temporary. On impact there is sharp appreciation of the real exchange rate, which will then depreciate back to its equilibrium level. In contrast to the permanent income hypothesis, real consumption jumps part of the way to its new long-run level, and then continues to rise. Depending on the capital-intensity of the investments needed for the adjustment, the economy may run a current account deficit or surplus in early years

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.cepr.org/pubs/dps/DP8086.asp
Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8086.

as in new window
Length:
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:cpr:ceprdp:8086

Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820

Order Information:
Email:

Related research

Keywords: absorption constraints; absorptive capacity; aid; Dutch disease; natural resources; windfall;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Xavier Sala-i-Martín & Arvind Subramanian, 2003. "Addressing the natural resource curse: An illustration from Nigeria," Economics Working Papers 685, Department of Economics and Business, Universitat Pompeu Fabra.
  2. BLACKORBY, Ch. & SCHWORM, W. & VENABLES, A., 1986. "Necessary and sufficient conditions for factor price equalization," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 1986047, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Frederick Van der Ploeg, 2010. "Natural Resources: Curse or Blessing?," CESifo Working Paper Series 3125, CESifo Group Munich.
  4. Harding, Torfinn & Venables, Anthony J, 2013. "The implications of natural resource exports for non-resource trade," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9318, C.E.P.R. Discussion Papers.
  5. Brahmbhatt, Milan & Canuto, Otaviano & Vostroknutova, Ekaterina, 2010. "Dealing with Dutch Disease," World Bank - Economic Premise, The World Bank, The World Bank, issue 16, pages 1-7, June.
  6. Turnovsky, Stephen J., 1997. "Fiscal Policy In A Growing Economy With Public Capital," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 1(03), pages 615-639, September.
  7. Gupta, Sanjeev & Kangur, Alvar & Papageorgiou, Chris & Wane, Abdoul, 2014. "Efficiency-Adjusted Public Capital and Growth," World Development, Elsevier, vol. 57(C), pages 164-178.
  8. Egil Matsen & Ragnar Torvik, 2002. "Optimal Dutch Disease," Working Paper Series, Department of Economics, Norwegian University of Science and Technology 2703, Department of Economics, Norwegian University of Science and Technology.
  9. Rudolfs Bems & Irineu E. Carvalho Filho, 2009. "Current Account and Precautionary Savings for Exporters of Exhaustible Resources," IMF Working Papers 09/33, International Monetary Fund.
  10. Zac Mills & Annette Kyobe & Jim Brumby & Chris Papageorgiou & Era Dabla-Norris, 2011. "Investing in Public Investment," IMF Working Papers 11/37, International Monetary Fund.
  11. Turnovsky Stephen J. & Sen Partha, 1995. "Investment in a Two-Sector Dependent Economy," Journal of the Japanese and International Economies, Elsevier, vol. 9(1), pages 29-55, March.
  12. Kirk Hamilton & John Hartwick, 2008. "Oil Stock Discovery and Dutch Disease," Working Papers, Queen's University, Department of Economics 1163, Queen's University, Department of Economics.
  13. Eastwood, R K & Venables, A J, 1982. "The Macroeconomic Implications of a Resource Discovery in an Open Economy," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 92(366), pages 285-99, June.
  14. Rudolfs Bems, 2008. "Aggregate Investment Expenditureson Tradable and Nontradable Goods," IMF Working Papers 08/45, International Monetary Fund.
  15. Peter S. Heller & Sanjeev Gupta, 2002. "Challenges in Expanding Development Assistance," IMF Policy Discussion Papers 02/5, International Monetary Fund.
  16. Arvind Subramanian & Xavier Sala-i-Martin, 2003. "Addressing the Natural Resource Curse," IMF Working Papers 03/139, International Monetary Fund.
  17. Paul Collier & Frederick van der Ploeg & Michael Spence & Anthony J Venables, 2009. "Managing Resource Revenues in Developing Economies," OxCarre Working Papers, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford 015, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  18. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, Econometric Society, vol. 50(6), pages 1345-70, November.
  19. A.K.M. Mahbub Morshed & Stephen Turnovsky, 2003. "Sectoral Adjustment Costs and Real Exchange Rate Dynamics in a Two-Sector Dependent Economy," Working Papers, University of Washington, Department of Economics UWEC-2002-17-P, University of Washington, Department of Economics, revised Jan 2003.
  20. Turnovsky,Stephen J., 2011. "Capital Accumulation and Economic Growth in a Small Open Economy," Cambridge Books, Cambridge University Press, number 9780521187527, 9.
  21. van der Ploeg, Frederick & Venables, Anthony J, 2011. "Natural resource wealth: the challenge of managing a windfall," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8694, C.E.P.R. Discussion Papers.
  22. Kareem Ismail, 2010. "The Structural Manifestation of the `Dutch Disease’," IMF Working Papers 10/103, International Monetary Fund.
  23. Corden, W Max & Neary, J Peter, 1982. "Booming Sector and De-Industrialisation in a Small Open Economy," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 92(368), pages 825-48, December.
  24. Mansoorian, Arman, 1991. "Resource Discoveries and 'Excessive' External Borrowing," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 101(409), pages 1497-509, November.
  25. 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.
  26. John Hartwick, 1976. "Intergenerational Equity and the Investing of Rents from Exhaustible Resources," Working Papers, Queen's University, Department of Economics 220, Queen's University, Department of Economics.
  27. Kehoe, Timothy J. & Ruhl, Kim J., 2009. "Sudden stops, sectoral reallocations, and the real exchange rate," Journal of Development Economics, Elsevier, vol. 89(2), pages 235-249, July.
  28. Frederick van der Ploeg, 2012. "Bottlenecks in Ramping Up Public Investment," OxCarre Working Papers, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford 066, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  29. van Wijnbergen, Sweder J G, 1984. "The 'Dutch Disease': A Disease after All?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 94(373), pages 41-55, March.
  30. Paul Collier & Jan Willem Gunning, 2005. "Asset Policies During an Oil Windfall: Some Simple Analytics," The World Economy, Wiley Blackwell, vol. 28(10), pages 1401-1415, October.
  31. 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.
  32. Syrquin, M. & Chenery, H.B., 1989. "Patterns Of Development, 1950 To 1983," World Bank - Discussion Papers, World Bank 41, World Bank.
  33. Frederick van der Ploeg & Anthony J. Venables, 2011. "Harnessing Windfall Revenues: Optimal Policies for Resource‐Rich Developing Economies," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 121(551), pages 1-30, March.
  34. Bourguignon, Fran.ois & Sundberg, Mark, 2006. "Absorptive Capacity and Achieving the MDGs," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) RP2006/47, World Institute for Development Economic Research (UNU-WIDER).
  35. Torvik, Ragnar, 2001. "Learning by doing and the Dutch disease," European Economic Review, Elsevier, vol. 45(2), pages 285-306, February.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Battaile, Bill & Chisik, Richard & Onder, Harun, 2014. "Services, inequality, and the dutch disease," Policy Research Working Paper Series 6966, The World Bank.
  2. Frederick Ploeg, 2012. "Bottlenecks in ramping up public investment," International Tax and Public Finance, Springer, Springer, vol. 19(4), pages 509-538, August.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:8086. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.