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When and Why Worry About Real Exchange Rate Appreciation? The Missing Link Between Dutch Disease and Growth

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  • International Monetary Fund
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    Abstract

    We review the literature on Dutch disease, and document that shocks that trigger foreign exchange inflows (such as natural resource booms, surges in foreign aid, remittances, or capital inflows) appreciate the real exchange rate, generate factor reallocation, and reduce manufacturing output and net exports. We also observe that real exchange rate misalignment due to overvaluation and higher volatility of the real exchange rate lower growth. Regarding the effect of undervaluation of the exchange rate on economic growth, the evidence is mixed and inconclusive. However, there is no evidence in the literature that Dutch disease reduces overall economic growth. Policy responses should aim at adequately managing the boom and the risks associated with it.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/271.

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    Length: 32
    Date of creation: 01 Dec 2010
    Date of revision:
    Handle: RePEc:imf:imfwpa:10/271

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    Related research

    Keywords: Capital inflows; Commodity price fluctuations; Economic growth; Exchange rate appreciation; External shocks; Real effective exchange rates; exchange rate; real exchange rate; tradable goods; real exchange rate appreciation; foreign exchange; real exchange rate misalignment; exchange rate misalignment; exchange rates; open economy; exchange rate overvaluation; nontradable goods; real exchange rates; real exchange rate overvaluation; terms of trade; undervalued exchange rate; exchange rate volatility; exchange rate regimes; exchange rate depreciation; net exports; aggregate demand; positive externalities; real exchange rate depreciation; exchange rate level; domestic demand; competitive real exchange rate; overvalued exchange rate; income distribution; export sector; real exchange rate volatility; trade shocks; exporting countries; oil shock; exchange rate regime; domestic savings; exchange rate policy; exchange rate overvaluations; exchange rate behavior; equilibrium model; terms of trade shocks; exchange rate intervention; export performance; real exchange rate behavior; exchange rate uncertainty; exchange rate misalignments; undervalued exchange rates; factor price; open economies; competitive ? real exchange rate; economic interdependence; real exchange rate misalignments; exchange rate economics; flexible exchange rates; national policies; domestic aggregate demand; fixed exchange rate; exchange rate interventions; export prices; real exchange rate overvaluations; exchange earnings; effective exchange rate; oil exporter; exchange rate variability; exchange rate depreciations; output volatility; flexible exchange rate regime; real effective exchange rate; export price; commodity prices; skilled labor; foreign exchange rate; political economy; world economy; foreign exchange earnings; foreign exchange market; foreign investment; fixed exchange rate regimes; output growth; transmission of technology; exogenous shock; dynamic growth; domestic production; exchange rate instability; export growth; rent-seeking behavior; domestic market; unskilled labor; export earnings; flexible exchange rate; trade model;

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    References

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    1. Christopher S. Adam & David L. Bevan, 2006. "Aid and the Supply Side: Public Investment, Export Performance, and Dutch Disease in Low-Income Countries," World Bank Economic Review, World Bank Group, World Bank Group, vol. 20(2), pages 261-290.
    2. Christopher Adam & David Bevan, 2004. "Aid, Public Expenditure and Dutch Disease," Development and Comp Systems 0409027, EconWPA.
    3. Xavier Sala-i-Martin & Arvind Subramanian, 2003. "Addressing the Natural Resource Curse: An Illustration from Nigeria," NBER Working Papers 9804, National Bureau of Economic Research, Inc.
    4. 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.
    5. Amuedo-Dorantes, Catalina & Pozo, Susan, 2004. "Workers' Remittances and the Real Exchange Rate: A Paradox of Gifts," World Development, Elsevier, Elsevier, vol. 32(8), pages 1407-1417, August.
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    Cited by:
    1. Jaroslava Durčáková & Ondřej Šíma, 2013. "BRICS: Exchange Rate policy in Context of Internal and External Equilibrium," Český finanční a účetní časopis, University of Economics, Prague, University of Economics, Prague, vol. 2013(4), pages 7-29.
    2. Jorge Katz & Gonzalo Bernat, 2013. "Macroeconomic Adjustment and Structural Change: The Experience of Argentina, Brazil and Chile in 2000-2010," Institutions and Economies (formerly known as International Journal of Institutions and Economies), Faculty of Economics and Administration, University of Malaya, Faculty of Economics and Administration, University of Malaya, vol. 5(2), pages 37-58, July.
    3. Kojo, Naoko C., 2014. "Demystifying Dutch disease," Policy Research Working Paper Series 6981, The World Bank.
    4. Alper, Ahmet Murat & Civcir, İrfan, 2012. "Can overvaluation prelude to crisis and harm growth in Turkey," Journal of Policy Modeling, Elsevier, Elsevier, vol. 34(1), pages 112-131.
    5. Elissaios Papyrakis & Ohad Raveh, 2014. "An Empirical Analysis of a Regional Dutch Disease: The Case of Canada," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 58(2), pages 179-198, June.
    6. Christos Nikas & Student Anastasia Blouchoutzi, 2014. "Emigrants’ Remittances and the “Dutch Disease” in Small Transition Economies: the Case Of Albania and Moldova," Romanian Statistical Review, Romanian Statistical Review, Romanian Statistical Review, vol. 62(1), pages 45-65, March.

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