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The Structural Manifestation of the `Dutch Disease’

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  • Kareem Ismail

Abstract

This study derives structural implications of the Dutch disease in oil-exporting countries due to permanent oil price shocks from a typical model. We then test these implications in manufacturing sector data across a wide group of countries including oil-exporters covering 1977 to 2004. The results on oil-exporting countries are four folds. First, we find that permanent increases in oil price negatively impact output in manufacturing as consistent with the Dutch disease. Second, Evidence in the data shows that oil windfall shocks have a stronger impact on manufacturing sectors in countries with more open capital markets to foreign investment. Third, we find that the relative factor price of labor to capital, and capital intensity in manufacturing sectors appreciate as windfall increases. Fourth, we find that manufacturing sectors with higher capital intensity are less affected by windfall shocks than their peers, possibly due to a larger share of the effect being absorbed by more laborintensive tradable sectors. An implication of the fourth result is that having diverse manufacturing sectors in capital intensity helps cushion the volatility of oil shocks.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/103.

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Length: 36
Date of creation: 01 Apr 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/103

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Related research

Keywords: Development; Capital; Economic models; External shocks; Industrial sector; Labor costs; Manufacturing sector; Oil exporting countries; Oil prices; Price increases; Production; Resource allocation; dutch disease; capital markets; capital mobility; capital market; open capital markets; capital intensity; financial integration; capital account liberalization; capital flows; capital stock; capital formation; excess demand; competitiveness; capital inflow; foreign capital; capital outflows; capital outflow; capital goods; capital inflows; open capital market; capital accounts; industrial capital; weak capital; exogenous shocks; dutch ? disease; capital accumulation; futures markets; capital depreciation; country comparison; gross domestic product; capital flow;

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