Absorbing a Windfall of Foreign Exchange: Dutch disease dymanics

Frederick (Rick) van der Ploeg and Anthony Venables

No 52, OxCarre Working Papers from Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford

Abstract: The permanent income rule is seldom the optimal response to a windfall of foreign exchange, such as that from a resource discovery. Absorptive capacity constraints require domestic investment, and investment in structures requires non-traded inputs the supply of which is constrained by the initial capital stock. This, particularly when combined with intra-sectoral capital immobility, delays adjustment and creates short run ‘Dutch disease’ symptoms as the real exchange rate sharply appreciates and overshoots its long run value. Optimal revenue management requires investing in the domestic non-traded goods sector and a slow build up of consumption. Accumulation of foreign assets adjusts to accommodate the time-paths of domestic consumption and investment.

Keywords: absorptive capacity; absorption constraints; irreversible investment; windfall; natural resources; Dutch disease; economic development (search for similar items in EconPapers)
JEL-codes: E21 E62 F43 H63 O11 Q33 (search for similar items in EconPapers)
Date: 2010-10-05
New Economics Papers: this item is included in nep-ene, nep-mac and nep-opm
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Absorbing a windfall of foreign exchange: Dutch disease dynamics (2013)
Working Paper: Absorbing A Windfall of Foreign Exchange: Dutch disease dynamics (2010)
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