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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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  • NICOLÁS MAGUD

    (International Monetary Fund, USA)

  • SEBASTIÁN SOSA

    (International Monetary Fund, USA)

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.

Suggested Citation

  • 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 1-27.
    • Handle: RePEc:wsi:jicepx:v:04:y:2013:i:02:n:s1793993313500099
    DOI: 10.1142/S1793993313500099
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    References listed on IDEAS

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    Cited by:

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    2. Chen, Shiu-Sheng, 2017. "Exchange rate undervaluation and R&D activity," Journal of International Money and Finance, Elsevier, vol. 72(C), pages 148-160.
    3. Zhan, Zhan & Naqvi, Bushra & Rizvi, Syed Kumail Abbas & Cai, Xiaotong, 2021. "How exchange rate regimes are exacerbating or mitigating the resource curse?," Resources Policy, Elsevier, vol. 72(C).
    4. Mario Pečarić & Tino Kusanović & Pavle Jakovac, 2021. "The Determinants of FDI Sectoral Structure in the Central and East European EU Countries," Economies, MDPI, vol. 9(2), pages 1-16, April.
    5. Missio, Fabricio & Araujo, Ricardo Azevedo & Jayme, Frederico G., 2017. "Endogenous elasticities and the impact of the real exchange rate on structural economic dynamics," Structural Change and Economic Dynamics, Elsevier, vol. 42(C), pages 67-75.
    6. A. Wondemu Kifle & Potts David, 2016. "Working Paper 240 - The Impact of the Real Exchange Rate Changes on Export Performance in Tanzania and Ethiopia," Working Paper Series 2348, African Development Bank.
    7. García-Cicco, Javier & Kawamura, Enrique, 2015. "Dealing with the Dutch disease: Fiscal rules and macro-prudential policies," Journal of International Money and Finance, Elsevier, vol. 55(C), pages 205-239.
    8. García-Cicco, Javier & Kawamura, Enrique, 2015. "Dealing with the Dutch disease: Fiscal rules and macro-prudential policies," Journal of International Money and Finance, Elsevier, vol. 55(C), pages 205-239.
    9. Niftiyev, Ibrahim, 2018. "De-Industrialization Patterns of Azerbaijan: Potential Outcomes of Dutch Disease Syndrome," EconStor Preprints 227733, ZBW - Leibniz Information Centre for Economics.
    10. Liang, Huijun & Shi, Changkuan & Abid, Nabila & Yu, Yanliang, 2023. "Are digitalization and human development discarding the resource curse in emerging economies?," Resources Policy, Elsevier, vol. 85(PB).
    11. Niftiyev, Ibrahim, 2020. "The De-industrialization Process In Azerbaijan: Dutch Disease Syndrome Revisited," EconStor Conference Papers 227485, ZBW - Leibniz Information Centre for Economics.

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    More about this item

    Keywords

    Dutch disease; real exchange rate; growth; F24; F31; F35; F43;
    All these keywords.

    JEL classification:

    • F24 - International Economics - - International Factor Movements and International Business - - - Remittances
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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