Dutch disease and fiscal policy

Fabrizio Orrego () and Germán Vega
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Germán Vega: Universidad de Piura

No 2013-021, Working Papers from Banco Central de Reserva del Perú

Abstract: We study the implications of the so-called Dutch disease in a small open economy that receives signifficant inflows of funds due to an extraordinary increase in the international price of minerals. We consider three sectors, the tradeable sector, the booming sector and the non-tradeable sector in an otherwise standard real-business-cycle model. We find that the booming sector, that benefits from high international prices, induces the Dutch disease, that is, the tradeable sector declines, the real exchange rate appreciates, wages increase and the non-tradeable sector improves. We then introduce fiscal policies that aim to alleviate the consequences of the Dutch disease. One particular rule that boosts the productivity of firms seems to offset the effects of the Dutch disease.

Keywords: Small open economy; Dutch disease; scal policy (search for similar items in EconPapers)
JEL-codes: E62 F31 F41 (search for similar items in EconPapers)
Date: 2013-12
New Economics Papers: this item is included in nep-mac and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:rbp:wpaper:2013-021

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