The Dutch Disease revisited: absorption constraint and learning by doing

This paper revisits the Dutch disease by analyzing the general equilibrium effects of a resource shock on a dependent economy, both in a static and dynamic setting. The novel aspect of this study is to incorporate two features of the Dutch disease literature that have only been analyzed in isolation from each other: capital accumulation with absorption constraint and productivity growth induced by learning by doing. The conventional result of long-run exchange rate appreciation is maintained in line with the Dutch Disease literature. In addition, a permanent change in the employment shares occurs after the resource windfall, in favor of the non-traded sector and away from the traded sector growth engine of the economy. In other words, in the long-run both of the classic symptoms of the Dutch Disease remain in place.