Dutch disease is often referred as a situation in which large and sustained foreign currency inflows lead to a contraction of the tradable sector by giving rise to a real appreciation of the home currency. This paper documents that this syndrome has been witnessed by many emerging markets and developing economies (EMDEs) as a result of surges in capital inflows driven by accommodative U. S. monetary policy. In a sample of 25 EMDEs from 2000-17, U. S. monetary policy shocks coincided with episodes of currency appreciation and a contraction in tradable output in these economies. The paper also shows empirically that the use of capital flow measures (CFMs) has been a common policy response in several EMDEs to U.S. monetary policy shocks. Against this background, the paper presents a two sector small open economy augmented with a learning-by-doing (LBD) mechanism in the tradable sector to rationalize these empirical findings. A welfare analysis provides a rationale for the use of CFMs as a second-best policy when agents do not internalize the LBD externality of costly resource misallocation as a result of greater capital inflows. However, the adequate calibration of CFMs and the quantification of the LBD externality represent important implementation challenges.
Mr. Johannes Herderschee, Ran Li, Abdoulaye Ouedraogo, and Ms. Luisa Zanforlin
Whereas most of the literature related to the so-called “resource curse” tends to emphasize on institutional factors and public policies, in this research we focus on the role of the financial sector, which has been surprisingly overlooked. We find that countries that have financial systems with more depth, as well as those that actively manage their central banks’ balance sheets experience less exchange-rate appreciation than countries that do not. We analyze the relationship between these two findings and suggest that they appear to follow separate mechanisms.
We examine the existing fiscal policy paradigm in commodity-exporting countries. First,
we argue that its centerpiece—the permanent income hypothesis (PIH)—is not consistent
with either intergenerational equity or long-term sustainability in the presence of
uncertainty. Policies to achieve these goals need to be more prudent and better anchored
than the PIH. Second, we point out the presence of a volatility tradeoff between
government spending and wealth and re-assess long-held views on the appropriate fiscal
anchors, the vice of procyclicality, and the (im)possibility of simultaneously smoothing
consumption and ensuring intergenerational equity and sustainability. Finally, we propose
what we call a prudent wealth stabilization policy that would be more consistent with
long-term fiscal policy goals, yet relatively simple to implement and communicate.
Julia Faltermeier, Mr. Ruy Lama, and Juan Pablo Medina
We study the optimal foreign exchange (FX) intervention policy in response to a positive terms of trade shock
and associated Dutch disease episode in a small open economy model. We find that during a Dutch disease
episode tradable production drops below the socially optimal level, resulting in lower welfare under learningby-
doing (LBD) externalities. FX reserves accumulation improves welfare by preventing a large appreciation of
the real exchange rate and by inducing an efficient reallocation between the tradable and non-tradable sectors.
For an empirically plausible parametrization of LBD externalities, the model predicts that in response to a 10
percent increase in commodity prices FX reserves should increase by 1.5 percent of GDP. We also find that the
welfare gains from optimally using FX reserves are twice as high as the gains from relying only on monetary
policy. These results suggest that FX intervention is a beneficial policy to counteract the loss of competitiveness
during a Dutch disease episode.
Aqib Aslam, Samya Beidas-Strom, Mr. Rudolfs Bems, Oya Celasun, and Zsoka Koczan
Commodity prices have declined sharply over the past three years, and output growth has
slowed considerably among countries that are net exporters of commodities. A critical
question for policy makers in these economies is whether commodity windfalls influence
potential output. Our analysis suggests that both actual and potential output move together
with commodity terms of trade, but that actual output comoves twice as strongly as
potential output. The weak commodity price outlook is estimated to subtract 1 to 2¼
percentage points from actual output growth annually on average during 2015-17. The
forecast drag on potential output is about one-third of that for actual output.
The global boom in hydrocarbon, metal and mineral prices since the year 2000 created huge
economic rents - rents which, once invested, were widely expected to promote productivity
growth in other parts of the booming economies, creating a lasting legacy of the boom years.
This paper asks whether this has happened. To properly address this question the empirical
strategy must look behind the veil of the booming sector because that, by definition, will
boom in a boom. So the paper considers new data on GDP per person outside of the resource
sector. Despite having vast sums to invest, GDP growth per-capita outside of the booming
sectors appears on average to have been no faster during the boom years than before. The
paper finds no country in which (non-resource) growth per-person has been statisticallysignificantly
higher during the boom years. In some Gulf states, oil rents have financed a
migration-facilitated economic expansion with small or negative productivity gains. Overall,
there is little evidence the booms have left behind the anticipated productivity transformation
in the domestic economies. It appears that current policies are, overall, prooving insufficient
to spur lasting development outside resource intensive sectors.
We examine the impact of resource windfall on the standard of living both in the short-run and long-run, using a sample of 130 countries, 1963-2007. Then, we systematically investigate the effect of resource windfall on welfare in three different groups of countries: We find that in the short-run resource windfall is welfare enhancing in the whole sample, especially via increases in income and decreases in inequality. However, in
SSA countries, the size of welfare improvement is small and it is smaller and almost zero
after one year in fragile Sub-Saharan African (SSA) countries. In the whole sample, a
resource windfall shock leads to significant welfare growth even in the long-run, but we
couldn’t find any significant long-run effect of resource windfall in SSA countries.