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Dealing with the Dutch Disease: Fiscal Rules and Macro-Prudential Policies

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

This paper evaluates from a welfare perspective three policy alternatives for dealing with Dutch disease problems originating from cyclical movements in commodity prices: fiscal rules for government expenditures, capital controls, and taxes on domestic lending. A DSGE model of a small open economy is developed, 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 model is calibrated using Chilean data. For each policy tool, optimal simple rules are analyzed from a welfare (Ramsey) perspective, describing how different households rank the several policy alternatives, and studying how each of the models features shapes the optimal policy design. A general conclusion of the analysis is that the included Dutch disease inefficiencies are of quantitatively limited relevance in analyzing the desirability of these policies from a welfare perspective.

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Paper provided by Inter-American Development Bank in its series IDB Publications (Working Papers) with number 90216.

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Date of creation: Jul 2015
Handle: RePEc:idb:brikps:90216
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