Fiscal Policy and Dutch Disease

22 Pages Posted: 4 Apr 2011

Date Written: March 31, 2011

Abstract

In this paper we revisit the Dutch disease paying particular attention to the role of specific factors of production and capital stock dynamics. The main insight is that if the natural resource rich windfall is substantial but not large enough for the country to become a rentier, capital goods must be produced at home and adjustment to natural resource windfall takes time. It takes time to build this home-grown capital. Specific factors are crucial to explain the dynamic responses of the real exchange rate, capital intensities and wages in response to a natural resource windfall. If a country is small and the windfall is large, it may be able to import capital and migrant labour in which case the Dutch disease can be avoided.

Keywords: specific factors, real exchange rate, capital stock dynamics, factor intensity, international trade, Dutch disease, permanent income, fiscal policy rules, overlapping generations

JEL Classification: E010, F430, O410, Q300

Suggested Citation

van der Ploeg, Frederick, Fiscal Policy and Dutch Disease (March 31, 2011). CESifo Working Paper Series No. 3398. Available at SSRN: https://ssrn.com/abstract=1802359

Frederick Van der Ploeg (Contact Author)

University of Oxford ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom

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