Dealing with the Dutch disease: Fiscal rules and macro-prudential policies

Javier García-Cicco and Enrique Kawamura
Authors registered in the RePEc Author Service: Javier Garcia Cicco

Journal of International Money and Finance, 2015, vol. 55, issue C, 205-239

Abstract: We evaluate from a welfare perspective three policy alternatives frequently proposed to deal with Dutch-disease problems originated from cyclical movements in commodity prices. Namely, fiscal rules for government expenditures, capital controls, and taxes to domestic lending. To this end, we develop a DSGE model of a small open economy with a sectoral decomposition that features three distinctive characteristics: financial frictions, a learning-by-doing externality in the industrial sector, and a fraction of households being non-Ricardian (credit constrained). The first two features induce inefficient relocations after commodity shocks, while the later is relevant to study the role of fiscal rules. We calibrate the model using Chilean data, applying an impulse-response-matching approach. For each of the policy tools, we analyze optimal simple rules from a welfare (Ramsey) perspective, describing how different households rank the several policy alternatives, and studying how each of the models features shape the optimal policy design. A general conclusion of the analysis is that the included Dutch-disease inefficiencies are of limited quantitative relevance in analyzing the desirability of these policies from a welfare perspective.

Keywords: Dutch-disease; Fiscal pro-cyclicality; Fiscal rules; Capital controls; Macro-prudential policies (search for similar items in EconPapers)
JEL-codes: E61 F41 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0261560615000248
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Dealing with the Dutch Disease: Fiscal Rules and Macro-Prudential Policies (2015)
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:eee:jimfin:v:55:y:2015:i:c:p:205-239

DOI: 10.1016/j.jimonfin.2015.02.009

Access Statistics for this article

Journal of International Money and Finance is currently edited by J. R. Lothian

More articles in Journal of International Money and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().