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Is Exchange Rate Stabilization a+L4510n Appropriate Cure for the Dutch Disease?

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Author Info

  • Juan Pablo Medina Guzman
  • Ruy Lama

Abstract

This paper evaluates how successful is a policy of exchange rate stabilization to counteract the negative effects of a Dutch Disease episode. We consider a small open economy model that incorporates nominal rigidities and a learning-by-doing externality in the tradable sector. The paper shows that leaning against an appreciated exchange rate can prevent an inefficient loss of tradable output but at the cost of generating a misallocation of resources in other sectors of the economy. The paper also finds that welfare is a decreasing function of exchange rate intervention. These results suggest that stabilizing the nominal exchange rate in response to a Dutch Disease episode is highly distortionary.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/182.

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Length: 43
Date of creation: 01 Aug 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/182

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Related research

Keywords: Monetary policy; Economic models; Exchange rate appreciation; Exchange rate stability; Exchange rates; Export markets; External shocks; Manufacturing sector; Stabilization measures; exchange rate; exchange rate intervention; real exchange rate; open economy; commodity prices; tradable goods; terms of trade; open economies; elasticity of substitution; foreign exchange; nominal exchange rate; exchange rate policy; fixed exchange rate; effective exchange rate; real effective exchange rate; real exchange rate appreciation; exchange rate depreciation; political economy; aggregate demand; foreign exchange rate; fixed exchange rate policy; intermediate goods; exchange rate volatility; real exchange rate volatility; flexible exchange rates; exchange rate regimes; imported goods; exchange rate fluctuations; exchange rate movements; nominal interest rate; constant elasticity of substitution; foreign exchange market; domestic market; dynamic effects; exchange rate appreciations; wholesale price; factor markets; oil prices; output elasticity; exchange rate adjustment; trade partners; tradable goods sectors; export sector; flexible exchange rate; output volatility; currency depreciation; domestic firms;

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References

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  1. Stephanie Schmitt-Grohe & Martin Uribe, 2005. "Optimal Fiscal and Monetary Policy in a Medium-Scale Macroeconomic Model: Expanded Version," NBER Working Papers 11417, National Bureau of Economic Research, Inc.
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Cited by:
  1. Hernando Vargas Herrera & Andrés González & Diego Rodríguez, 2013. "Foreign Exchange Intervention in Colombia," Borradores de Economia 757, Banco de la Republica de Colombia.
  2. Ruslan Aliyev, 2012. "Monetary Policy in Resource-Rich Developing Economies," CERGE-EI Working Papers wp466, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  3. Hilde C. Bjørnland & Leif Anders Thorsrud, 2013. "Boom or gloom? Examining the Dutch disease in a two-speed economy," CAMA Working Papers 2013-76, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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