Monetary Policy and the Dutch Disease in a Small Open Oil Exporting Economy

Mohamed Benkhodja

Working Papers from HAL

Abstract: In this paper, we compare, first, the impact of a windfall and a boom sectors on the economy of an oil exporting country and their welfare implications ; in a second step, we analyze how monetary policy should be conducted to insulate the economy from the main impact of these shocks, namely the Dutch Disease. To do so, we built a Multisector DSGE model with nominal and real rigidities. The main finding is that Dutch disease effect arise after spending and resource movement effects in the following cases : i) flexible prices and wages both in the case of a windfall and in the case of a boom ; ii) flexible wage and sticky price only in the case of a fixed exchange rate. In other cases, Dutch disease effect can be avoided if : prices are sticky and wages are flexible when the exchange rate is flexible ; iii) prices and wages are sticky whatever the objective of the central bank is in both cases : windfall and boom. We also compare the source of fluctuation that leads to Dutch disease effect and we conclude that the windfall leads to a strong e¤ect in terms of de-industrialization compared to a boom. The choice of flexible exchange rate regime also helps to improve welfare.

Keywords: Monetary Policy; Dutch Disease; Oil Prices; Small Open Economy (search for similar items in EconPapers)
Date: 2011-12-22
New Economics Papers: this item is included in nep-cba, nep-ene, nep-mac, nep-mon and nep-opm
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00654511v1
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Citations: View citations in EconPapers (7)

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Related works:
Working Paper: Monetary Policy and the Dutch Disease in a Small Open Oil Exporting Economy (2011)
Working Paper: Monetary Policy and the Dutch Disease in a Small Open Oil Exporting Economy (2011)
Working Paper: Monetary Policy and the Dutch Disease in a Small Open Oil Exporting Economy (2011)
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