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Dutch disease and fiscal policy

Author

Listed:
  • Orrego, Fabrizio

    (Banco Central de Reserva del Perú)

  • Vega, Germán

    (Universidad de Piura)

Abstract

We study the implications of the so-called Dutch disease in a small open economy that receives signifficant inflows of funds due to an extraordinary increase in the international price of minerals. We consider three sectors, the tradeable sector, the booming sector and the non-tradeable sector in an otherwise standard real-business-cycle model. We find that the booming sector, that benefits from high international prices, induces the Dutch disease, that is, the tradeable sector declines, the real exchange rate appreciates, wages increase and the non-tradeable sector improves. We then introduce fiscal policies that aim to alleviate the consequences of the Dutch disease. One particular rule that boosts the productivity of firms seems to offset the effects of the Dutch disease.

Suggested Citation

  • Orrego, Fabrizio & Vega, Germán, 2013. "Dutch disease and fiscal policy," Working Papers 2013-021, Banco Central de Reserva del Perú.
  • Handle: RePEc:rbp:wpaper:2013-021
    as

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    File URL: http://www.bcrp.gob.pe/docs/Publicaciones/Documentos-de-Trabajo/2013/documento-de-trabajo-21-2013.pdf
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    References listed on IDEAS

    as
    1. Ruy Lama & Juan Pablo Medina, 2012. "Is Exchange Rate Stabilization an Appropriate Cure for the Dutch Disease?," International Journal of Central Banking, International Journal of Central Banking, vol. 8(1), pages 5-46, March.
    2. Acosta, Pablo A. & Lartey, Emmanuel K.K. & Mandelman, Federico S., 2009. "Remittances and the Dutch disease," Journal of International Economics, Elsevier, pages 102-116.
    3. Constantino Hevia & Pablo Andrés Neumeyer & Juan Pablo Nicolini, 2013. "Optimal Monetary and Fiscal Policy in a New Keynesian Model with a Dutch Disease: The Case of Complete Markets," Department of Economics Working Papers 2013_3, Universidad Torcuato Di Tella.
    4. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, pages 315-334.
    5. Emmanuel K. K. Lartey, 2008. "Capital Inflows, Dutch Disease Effects, and Monetary Policy in a Small Open Economy," Review of International Economics, Wiley Blackwell, vol. 16(5), pages 971-989, November.
    6. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, pages 315-334.
    7. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, pages 797-818.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Small open economy; Dutch disease; scal policy;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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