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The Dutch Disease in Australia Policy Options for a Three-Speed Economy

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  • W. Max Corden

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    Abstract

    This paper expounds the concept of Dutch Disease as it applies currently to Australia, noting the various gains and losses resulting from the Australian mining boom. "Dutch Disease" refers to the adverse effects through real exchange rate appreciation that such a boom can have on various export and import-competing industries. Particular firms or industries may be both gainers and losers. The distinction is made between the Booming Sector (mining), the Lagging Sector (exports not part of the Booming Sector, and import-competing goods and services), and the Non-tradable Sector. The main discussion focuses on policy options, given a floating exchange rate regime: Do nothing, piecemeal protectionism, and establish a Sovereign Wealth Fund. The costs of any measures that successfully moderate real appreciation of the exchange rate "exchange rate protection" are noted. An issue is whether firms and industries can be clearly divided into those that belong to the Non-tradable Sector and those that belong to the Lagging Sector, the latter being the losers from Dutch Disease. If such a clear distinction cannot usually be made, then the case for "doing nothing" is strengthened. Finally, the implications of direct intervention by the central bank in the foreign exchange market are explored, and (when combined with appropriate fiscal policy) are shown to have certain similarities with the effects of a Sovereign Wealth Fund.

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    File URL: https://crawford.anu.edu.au/acde/publications/publish/papers/wp2011/wp_econ_2011_14.pdf
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    Bibliographic Info

    Paper provided by The Australian National University, Arndt-Corden Department of Economics in its series Departmental Working Papers with number 2011-14.

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    Length: 27 pages
    Date of creation: 2011
    Date of revision:
    Handle: RePEc:pas:papers:2011-14

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    Keywords: Dutch Disease; exchange rate protection; mining boom; Sovereign Wealth Fund;

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    1. Gregory, R.G., 1976. "Some Implications Of The Growth Of The Mineral Sector," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 20(02), August.
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