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

Juan Medina and Ruy Lama

No 2010/182, IMF Working Papers from International Monetary Fund

Abstract: This paper evaluates how successful is a policy of exchange rate stabilization to counteract the negative effects of a Dutch Disease episode. We consider a small open economy model that incorporates nominal rigidities and a learning-by-doing 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 is highly distortionary.

Keywords: WP; learning by doing (search for similar items in EconPapers)
Pages: 43
Date: 2010-08-01
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Citations: View citations in EconPapers (14)

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Journal Article: Is Exchange Rate Stabilization an Appropriate Cure for the Dutch Disease? (2012)
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