Absorbing A Windfall of Foreign Exchange: Dutch disease dynamics

Frederick (Rick) van der Ploeg and Anthony Venables

No 8086, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The response of an economy to a windfall of foreign exchange (be it aid or natural resource revenues) is often constrained by absorptive capacity. We provide a micro-founded analysis of absorption constraints, based on the idea that expanding the economy?s capital stock (in aggregate or sectorally) requires non-traded inputs, the supply of which is constrained by the initial capital stock. Given this constraint, the economy will manifest ?Dutch disease? symptoms, although many of them are temporary. On impact there is sharp appreciation of the real exchange rate, which will then depreciate back to its equilibrium level. In contrast to the permanent income hypothesis, real consumption jumps part of the way to its new long-run level, and then continues to rise. Depending on the capital-intensity of the investments needed for the adjustment, the economy may run a current account deficit or surplus in early years

Keywords: Absorptive capacity; Absorption constraints; Windfall; Aid; Natural resources; Dutch disease (search for similar items in EconPapers)
JEL-codes: E21 E22 F10 F35 H63 O16 Q33 Z (search for similar items in EconPapers)
Date: 2010-10
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Citations: View citations in EconPapers (3)

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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 dymanics (2010)
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