Is Exchange Rate Stabilization an Appropriate Cure for the Dutch Disease?

Ruy Lama and Juan Medina

International Journal of Central Banking, 2012, vol. 8, issue 1, 5-46

Abstract: This paper evaluates how successful a policy of exchange rate stabilization is in counteracting the negative effects of a Dutch disease episode. We consider a small open-economy model that incorporates nominal rigidities and a learning-bydoing externality in the tradable sector. The paper shows that leaning against an appreciated exchange rate can prevent an inefficient loss of tradable output but at the cost of generating a misallocation of resources in other sectors of the economy. The paper also finds that welfare is a decreasing function of exchange rate intervention. These results suggest that stabilizing the nominal exchange rate in response to a Dutch disease episode could be highly distortionary.

JEL-codes: E52 F31 F41 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (42)

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Related works:
Working Paper: Is Exchange Rate Stabilization an Appropriate Cure for the Dutch Disease? (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ijc:ijcjou:y:2012:q:1:a:1

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