EconPapers    
Economics at your fingertips  
 

Oil, Disinflation, and Export Competitiveness: A Model of the "Dutch Disease"

Willem Buiter () and Douglas Purvis

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: This paper examines three possible sources of "de-industrialization" in an open economy : monetary disinflation, an increase in the international price of oil, and a domestic oil discovery. the analysis is conducted using a model which incorporates different speeds of adjustment in goods and asset markets ; domestic goods prices respond only sluggishly to excess demand while the exchange rate (and hence the price of imported goods) adjusts quickly. Monetary disinflation leads to reduce real balances, higher interest rates, and a lower nominal exchange rate. In the short-run this causes a real appreciation and a decline in domestic manufacturing output. Perhaps surprisingly, an increase in world oil prices can create similar effects even for a country which is a net exporter of oil. Although the direct effect of an oil price increase for such a country is an increase in the demand for the domestic manufacturing good, that effect may be swamped by real appreciation created by the increased demand for the home currency. This corresponds rather closely to the recent experiences of several oil and gas exporting countries, and is commonly referred to as the "Dutch-Disease". In our analysis, however, this is only a transitional phenomeon. Domestic oil discoveries, though necessarily finite in nature, generate permanent income effects in demand which last beyond the productive life of the new oil reserve. Initially, current income is above permanent income, leading to an improvement in the trade account ; this is eventually reversed when permanent income exceeds current income. A wide variety of output response patterns are possible.

Date: 1980
References: Add references at CitEc
Citations: View citations in EconPapers (26) Track citations by RSS feed

Downloads: (external link)
https://warwick.ac.uk/fac/soc/economics/research/w ... 78-1988/twerp185.pdf

Related works:
Working Paper: OIL, DISINFLATION, AND EXPORT COMPETITIVENESS: A MODEL OF THE "DUTCH DISEASE" (1980) Downloads
Working Paper: Oil, Disinflation, and Export Competitiveness: A Model of the "Dutch Disease" (1980) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:185

Access Statistics for this paper

More papers in The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Margaret Nash ().

 
Page updated 2019-11-14
Handle: RePEc:wrk:warwec:185