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Dealing with the Dutch disease: Fiscal rules and macro-prudential policies

Listed author(s):
  • García-Cicco, Javier
  • Kawamura, Enrique

We evaluate from a welfare perspective three policy alternatives frequently proposed to deal with Dutch-disease problems originated from cyclical movements in commodity prices. Namely, fiscal rules for government expenditures, capital controls, and taxes to domestic lending. To this end, we develop a DSGE model of a small open economy with a sectoral decomposition that features three distinctive characteristics: financial frictions, a learning-by-doing externality in the industrial sector, and a fraction of households being non-Ricardian (credit constrained). The first two features induce inefficient relocations after commodity shocks, while the later is relevant to study the role of fiscal rules. We calibrate the model using Chilean data, applying an impulse-response-matching approach. For each of the policy tools, we analyze optimal simple rules from a welfare (Ramsey) perspective, describing how different households rank the several policy alternatives, and studying how each of the models features shape the optimal policy design. A general conclusion of the analysis is that the included Dutch-disease inefficiencies are of limited quantitative relevance in analyzing the desirability of these policies from a welfare perspective.

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File URL: http://www.sciencedirect.com/science/article/pii/S0261560615000248
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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 55 (2015)
Issue (Month): C ()
Pages: 205-239

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Handle: RePEc:eee:jimfin:v:55:y:2015:i:c:p:205-239
DOI: 10.1016/j.jimonfin.2015.02.009
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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