The macroeconomics of a financial Dutch disease

Arbeitspapier

We describe the medium-run macroeconomic effects and long-run development consequences of a financial Dutch disease that may take place in a small developing country with abundant natural resources. The first move is in financial markets. An initial surge in foreign direct investment targeting natural resources sets in motion a perverse cycle between exchange rate appreciation and mounting short- and medium-term capital flows. Such a spiral easily leads to exchange rate volatility, capital reversals, and sharp macroeconomic instability. In the long run, macroeconomic instability and overdependence on natural resource exports dampen the development of nontraditional tradable goods sectors and curtail labor productivity dynamics. We advise the introduction of constraints to short- and medium-term capital flows to tame exchange rate/capital flows boom-and-bust cycles. We support the implementation of a developmentalist monetary policy targeting competitive nominal and real exchange rates in order to encourage product and export diversification.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 850

Classification and Topics

• Classification: Wirtschaft ; Current Account Adjustment; Short-term Capital Movements ; Industrialization; Manufacturing and Service Industries; Choice of Technology ; Development Planning and Policy: Trade Policy; Factor Movement; Foreign Exchange Policy
• Subject: Financial Dutch Disease ; Exchange Rate Volatility ; Macroeconomic Instability ; Developmentalist Monetary Policy

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Botta, Alberto
• Event: Veröffentlichung
• (who): Levy Economics Institute of Bard College
• (where): Annandale-on-Hudson, NY
• (when): 2015

Further information

• Handle: http://hdl.handle.net/10419/146978
• Last update: 10.03.2025, 11:44 AM CET