When and Why Worry About Real Exchange Rate Appreciation? The Missing Link Between Dutch Disease and Growth

December 1, 2010

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Format: Chicago

When and Why Worry About Real Exchange Rate Appreciation? The Missing Link Between Dutch Disease and Growth, (USA: International Monetary Fund, 2010) accessed December 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We review the literature on Dutch disease, and document that shocks that trigger foreign exchange inflows (such as natural resource booms, surges in foreign aid, remittances, or capital inflows) appreciate the real exchange rate, generate factor reallocation, and reduce manufacturing output and net exports. We also observe that real exchange rate misalignment due to overvaluation and higher volatility of the real exchange rate lower growth. Regarding the effect of undervaluation of the exchange rate on economic growth, the evidence is mixed and inconclusive. However, there is no evidence in the literature that Dutch disease reduces overall economic growth. Policy responses should aim at adequately managing the boom and the risks associated with it.

Subject: Dutch disease, Economic theory, Environment, Exchange rates, Foreign aid, Foreign exchange, Natural resources, Real exchange rates

Keywords: Asia and Pacific, Caribbean, DD effect, DD model, DD phenomenon, DD shock, Dutch disease, Dutch disease effects, Exchange rate appreciation, Exchange rate intervention, Exchange rate overvaluation, Exchange rate volatility, Exchange rates, Growth, Learning by doing, Natural resource, Natural resources, Open economy, Overvalued exchange rate, Real exchange rate, Real exchange rates, Sub-Saharan Africa, Undervalued exchange rate, WP

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/271
Stock No:

WPIEA2010271
ISBN:

9781455210787
ISSN:

1018-5941

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