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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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References

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  1. 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.
  2. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  3. 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, vol. 45(179), pages 251-72, August.
  4. Wilson, Charles A, 1979. "Anticipated Shocks and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 87(3), pages 639-47, June.
  5. 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.
  6. Rudiger Dornbusch, 1980. "Monetary Stabilization, Intervention and Real Appreciation," NBER Working Papers 0472, National Bureau of Economic Research, Inc.
  7. Ronald E. Findlay & Carlos Alfredo Rodriguez, 1977. "Intermediate Imports and Macroeconomic Policy under Flexible Exchange Rates," Canadian Journal of Economics, Canadian Economics Association, vol. 10(2), pages 208-17, May.
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Citations

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Cited by:
  1. Cox, Grant M. & Harvie, Charles, 2010. "Resource price turbulence and macroeconomic adjustment for a resource exporter: A conceptual framework for policy analysis," Energy Economics, Elsevier, vol. 32(2), pages 469-489, March.
  2. Oomes , Nienke & Kalcheva, Katerina, 2007. "Diagnosing Dutch disease: Does Russia have the symptoms?," BOFIT Discussion Papers 7/2007, Bank of Finland, Institute for Economies in Transition.
  3. Michael Bruno & Jeffrey Sachs, 1982. "Energy and Resource Allocation: A Dynamic Model of the "Dutch Disease"," NBER Working Papers 0852, National Bureau of Economic Research, Inc.
  4. Hasanov, Fakhri, 2010. "The impact of real oil price on real effective exchange rate: The case of Azerbaijan," MPRA Paper 33493, University Library of Munich, Germany.
  5. Somayeh Mardaneh, 2012. "Inflation Dynamics in a Dutch Disease Economy," Discussion Papers in Economics 12/25, Department of Economics, University of Leicester.
  6. van der Ploeg, Frederick, 2006. "Challenges and Opportunities for Resource Rich Economies," CEPR Discussion Papers 5688, C.E.P.R. Discussion Papers.
  7. Hasanov Fakhri, 2011. "Analyzing price level in a booming economy: the case of Azerbaijan," EERC Working Paper Series 11/02e, EERC Research Network, Russia and CIS.
  8. Pentti J.K. Kouri, 1982. "Macroeconomics of Stagflation under Flexible Exchange Rates," NBER Working Papers 0868, National Bureau of Economic Research, Inc.
  9. Samuel Wills, 2014. "Optimal Monetary Responses to Oil Discoveries," CAMA Working Papers 2014-37, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  10. Nicolás Magud & Sebastián Sosa, 2013. "When And Why Worry About Real Exchange Rate Appreciation? The Missing Link Between Dutch Disease And Growth," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 4(02), pages 1350009-1-1.
  11. Harvie, Charles & Cox, Grant M, 2009. "Resource Price Turbulence and Macroeconomic Adjustment for a Resource Exporter: a conceptual framework for policy analysis," Economics Working Papers wp09-06, School of Economics, University of Wollongong, NSW, Australia.
  12. Fiona Atkins, 2000. "Revisiting the exchange rate debate: the Jamaican experience," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(1), pages 121-131.
  13. Singh, Rupinder & Laurila, Juhani, 1999. "Azerbaijan: Recent Economic Developments and Policy Issues in Sustainability of Growth," BOFIT Discussion Papers 5/1999, Bank of Finland, Institute for Economies in Transition.
  14. Willem H. Buiter & Marcus H. Miller, 1982. "Monetary Policy and International Competitiveness," NBER Working Papers 0591, National Bureau of Economic Research, Inc.
  15. Willem H. Buiter, 1999. "The EMU and the NAMU: What is the Case for North American Monetary Union?," Canadian Public Policy, University of Toronto Press, vol. 25(3), pages 285-305, September.
  16. Masanao Aoki & Sebastian Edwards, 1982. "Export Boom and Dutch Disease: A Dynamic Analysis," UCLA Economics Working Papers 269, UCLA Department of Economics.
  17. Christopher Ragan, 2005. "The Exchange Rate and Canadian Inflation Targeting," Working Papers 05-34, Bank of Canada.
  18. Clemens, Marius & Fuhrmann, Wilfried, 2008. "Rohstoffbasierte Staatsfonds: Theorie und Empirie
    [Resource-based sovereign wealth funds]
    ," MPRA Paper 16933, University Library of Munich, Germany.

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