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An Empirical Test of the Dutch Disease Hypothesis using a Gravity Model of Trade

  • Jean-Philippe Stijns

    (the University of California at Berkeley)

Although the core model of the Dutch Disease makes unambiguous predictions regarding the negative effect of a resource boom on a country’s manufacturing exports, the empirical literature that has followed has not clearly identified this effect. I attribute this to the failure of the existing literature to combine enough data to produce a sufficiently powerful and exogenous test. I will use the World Trade Database to systematically test this hypothesis in a gravity model of trade. World energy prices are used to bypass issues of endogeneity regarding primary exports. A one percent increase in world energy price is estimated to decrease a net energy exporter’s real manufacturing exports by almost half a percent. Similarly, after instrumentation, a one percent increase in an energy exporting country’s net energy exports is estimated decrease the country’s real manufacturing exports by 8 percent. The corresponding confidence intervals are tight and these results are shown to be quite robust.

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Paper provided by EconWPA in its series International Trade with number 0305001.

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Length: 61 pages
Date of creation: 05 May 2003
Date of revision:
Handle: RePEc:wpa:wuwpit:0305001
Note: Type of Document - MS Word 2002; prepared on Dell Inspiron 3800; to print on any; pages: 61; figures: included. Accepted for presentation at the 2003 Congress of the EEA, Stockholm, August 20 to August 24. Comments highly appreciated.
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