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Oil, Disinflation, and Export Competitiveness : A Model of the "Dutch Disease"

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  • Buiter, William H
  • Purvis, Douglas D

Abstract

This paper examines three possible sources of "de-industrialization" in an open economy : monetary disinflation, an increase in the international price of oil, and a domestic oil discovery. the analysis is conducted using a model which incorporates different speeds of adjustment in goods and asset markets ; domestic goods prices respond only sluggishly to excess demand while the exchange rate (and hence the price of imported goods) adjusts quickly. Monetary disinflation leads to reduce real balances, higher interest rates, and a lower nominal exchange rate. In the short-run this causes a real appreciation and a decline in domestic manufacturing output. Perhaps surprisingly, an increase in world oil prices can create similar effects even for a country which is a net exporter of oil. Although the direct effect of an oil price increase for such a country is an increase in the demand for the domestic manufacturing good, that effect may be swamped by real appreciation created by the increased demand for the home currency. This corresponds rather closely to the recent experiences of several oil and gas exporting countries, and is commonly referred to as the "Dutch-Disease". In our analysis, however, this is only a transitional phenomeon. Domestic oil discoveries, though necessarily finite in nature, generate permanent income effects in demand which last beyond the productive life of the new oil reserve. Initially, current income is above permanent income, leading to an improvement in the trade account ; this is eventually reversed when permanent income exceeds current income. A wide variety of output response patterns are possible.

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Bibliographic Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 185.

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Length: 40 pages
Date of creation: 1980
Date of revision:
Handle: RePEc:wrk:warwec:185

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  1. Rudiger Dornbusch, 1980. "Monetary Stabilization, Intervention and Real Appreciation," NBER Working Papers 0472, National Bureau of Economic Research, Inc.
  2. Buiter, Willem H, 1978. "Short-run and Long-run Effects of External Disturbances under a Floating Exchange Rate," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 45(179), pages 251-72, August.
  3. William H. Branson & Julio J. Rotemberg, 1981. "International adjustment with wage rigidity," NBER Chapters, in: International Seminar on Macroeconomics, pages 309-332 National Bureau of Economic Research, Inc.
  4. Michael Bruno & Jeffrey Sachs, 1979. "Macro-Economic Adjustment With Import Price Shocks: Real and Monetary Aspects," NBER Working Papers 0340, National Bureau of Economic Research, Inc.
  5. Ronald E. Findlay & Carlos Alfredo Rodriguez, 1977. "Intermediate Imports and Macroeconomic Policy under Flexible Exchange Rates," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 10(2), pages 208-17, May.
  6. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  7. Rudiger Dornbusch, 1980. "Exchange Rate Economics: Where Do We Stand?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 11(1, Tenth ), pages 143-206.
  8. Slobodan Djajic, 1980. "Intermediate Inputs and International Trade: An Analysis of the Real and Monetary Aspects of an Oil Price Shock," Working Papers, Queen's University, Department of Economics 394, Queen's University, Department of Economics.
  9. Wilson, Charles A, 1979. "Anticipated Shocks and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(3), pages 639-47, June.
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