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

No 7087, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: This paper evaluates from a welfare perspective three policy alternatives for dealing with Dutch disease problems originating from cyclical movements in commodity prices: fiscal rules for government expenditures, capital controls, and taxes on domestic lending. A DSGE model of a small open economy is developed, 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 model is calibrated using Chilean data. For each policy tool, optimal simple rules are analyzed from a welfare (Ramsey) perspective, describing how different households rank the several policy alternatives, and studying how each of the models features shapes the optimal policy design. A general conclusion of the analysis is that the included Dutch disease inefficiencies are of quantitatively limited relevance in analyzing the desirability of these policies from a welfare perspective.

Keywords: Dutch Disease; Capital controls; Macro-prudential policies; Fiscal rules; Fiscal procyclicality (search for similar items in EconPapers)
JEL-codes: F41 (search for similar items in EconPapers)
Date: 2015-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (29)

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Journal Article: Dealing with the Dutch disease: Fiscal rules and macro-prudential policies (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:idb:brikps:7087

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