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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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  • International Monetary Fund

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

  • International Monetary Fund, 2010. "When and Why Worry About Real Exchange Rate Appreciation? The Missing Link Between Dutch Disease and Growth," IMF Working Papers 10/271, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:10/271
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    1. Xavier Sala-i-Martin & Arvind Subramanian, 2013. "Addressing the Natural Resource Curse: An Illustration from Nigeria," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 22(4), pages 570-615, August.
    2. Christopher S. Adam & David L. Bevan, 2006. "Aid and the Supply Side: Public Investment, Export Performance, and Dutch Disease in Low-Income Countries," World Bank Economic Review, World Bank Group, vol. 20(2), pages 261-290.
    3. van Wijnbergen, Sweder J G, 1984. "The 'Dutch Disease': A Disease after All?," Economic Journal, Royal Economic Society, vol. 94(373), pages 41-55, March.
    4. Amuedo-Dorantes, Catalina & Pozo, Susan, 2004. "Workers' Remittances and the Real Exchange Rate: A Paradox of Gifts," World Development, Elsevier, vol. 32(8), pages 1407-1417, August.
    5. Christopher S. Adam & David L. Bevan, 2003. "Aid, Public Expenditure and Dutch Disease," CSAE Working Paper Series 2003-02, Centre for the Study of African Economies, University of Oxford.
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    Cited by:

    1. Jaroslava Durčáková & Ondřej Šíma, 2013. "BRICS: Exchange Rate policy in Context of Internal and External Equilibrium," Český finanční a účetní časopis, University of Economics, Prague, vol. 2013(4), pages 7-29.
    2. repec:ibn:ijefaa:v:9:y:2017:i:7:p:69-85 is not listed on IDEAS
    3. Koji Kubo, 2013. "Real exchange rate appreciation, resource boom, and policy reform in Myanmar," Asian-Pacific Economic Literature, Asia Pacific School of Economics and Government, The Australian National University, vol. 27(1), pages 110-126, May.
    4. Alper, Ahmet Murat & Civcir, İrfan, 2012. "Can overvaluation prelude to crisis and harm growth in Turkey," Journal of Policy Modeling, Elsevier, vol. 34(1), pages 112-131.
    5. Mariarosaria Comunale, 2016. "Dutch disease, real effective exchange rate misalignments and their effect on GDP growth in the EU," CAMA Working Papers 2016-28, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    6. José Fuinhas & António Marques & Alcino Couto, 2015. "Oil rents and economic growth in oil producing countries: evidence from a macro panel," Economic Change and Restructuring, Springer, vol. 48(3), pages 257-279, November.
    7. Kojo, Naoko C., 2014. "Demystifying Dutch disease," Policy Research Working Paper Series 6981, The World Bank.
    8. Jorge Katz & Gonzalo Bernat, 2013. "Macroeconomic Adjustment and Structural Change: The Experience of Argentina, Brazil and Chile in 2000-2010," Institutions and Economies (formerly known as International Journal of Institutions and Economies), Faculty of Economics and Administration, University of Malaya, vol. 5(2), pages 37-58, July.
    9. Carlos A. Ibarra, 2013. "Capital Flows and Private Investment in Mexico," Economía Mexicana NUEVA ÉPOCA, , vol. 0(3, Cierre), pages 65-99.
    10. Christos Nikas & Student Anastasia Blouchoutzi, 2014. "Emigrants’ Remittances and the “Dutch Disease” in Small Transition Economies: the Case Of Albania and Moldova," Romanian Statistical Review, Romanian Statistical Review, vol. 62(1), pages 45-65, March.
    11. repec:eur:ejesjr:136 is not listed on IDEAS
    12. repec:wsi:ceprxx:v:03:y:2014:i:02:n:s1793969014500101 is not listed on IDEAS
    13. Sierra, Lya Paola & Manrique L., Karina, 2014. "A first approach to the impact of the real exchange rate on industrial sectors in Colombia," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), December.
    14. Ansari, Dawud, 2016. "Resource curse contagion in the case of Yemen," Resources Policy, Elsevier, vol. 49(C), pages 444-454.
    15. Ruth Marcela Aparicio, 2014. "Terms of trade and non-traditional exports: a microeconometric analysis," Investigación & Desarrollo 0714, Universidad Privada Boliviana, revised Nov 2014.
    16. Borgersen, Trond-Arne & King, Roswitha M., 2015. "Endogenous supply side constraints to export-led growth and aggregate growth implications in transition economies," Structural Change and Economic Dynamics, Elsevier, vol. 33(C), pages 96-109.
    17. Elissaios Papyrakis & Ohad Raveh, 2014. "An Empirical Analysis of a Regional Dutch Disease: The Case of Canada," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 58(2), pages 179-198, June.

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