The macroeconomics of a financial Dutch disease

Alberto Botta

No 14065, Greenwich Papers in Political Economy from University of Greenwich, Greenwich Political Economy Research Centre

Abstract: We describe the medium-run macroeconomic effects and long-run development consequences of a financial Dutch disease that may take place in a small developing country with abundant natural resources. The first move is in financial markets. An initial surge in foreign direct investment targeting natural resources sets in motion a perverse cycle between exchange rate appreciation and mounting short- and medium-term capital flows. Such a spiral easily leads to exchange rate volatility, capital reversals, and sharp macroeconomic instability. In the long run, macroeconomic instability and overdependence on natural resource exports dampen the development of nontraditional tradable goods sectors and curtail labor productivity dynamics. We advise the introduction of constraints to short- and medium-term capital flows to tame exchange rate/capital flows boom-and-bust cycles. We support the implementation of a developmentalist monetary policy targeting competitive nominal and real exchange rates in order to encourage product and export diversification.

Keywords: financial Dutch disease; exchange rate volatility; macroeconomic instability; developmentalist monetary policy (search for similar items in EconPapers)
Date: 2015-06-01
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://gala.gre.ac.uk/id/eprint/14065/1/GPERC14_BottaF.pdf

Related works:
Working Paper: The Macroeconomics of a Financial Dutch Disease (2015)
Working Paper: The Macroeconomics of a Financial Dutch Disease (2014)
Working Paper: The macroeconomics of a financial Dutch disease (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gpe:wpaper:14065

Access Statistics for this paper

More papers in Greenwich Papers in Political Economy from University of Greenwich, Greenwich Political Economy Research Centre Contact information at EDIRC.
Bibliographic data for series maintained by Nadine Edwards ().