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

42 Pages Posted: 19 Jun 2004 Last revised: 15 Aug 2022

See all articles by Willem H. Buiter

Willem H. Buiter

Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Columbia University; Independent Economic Adviser; Independent

Douglas D. Purvis

Queens University (Deceased)

Date Written: December 1980


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 reduced 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 a 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 phenomenon. 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.

Suggested Citation

Buiter, Willem H. and Purvis, Douglas D., Oil, Disinflation, and Export Competitiveness: A Model of the "Dutch Disease" (December 1980). NBER Working Paper No. w0592, Available at SSRN: https://ssrn.com/abstract=275422

Willem H. Buiter (Contact Author)

Centre for Economic Policy Research (CEPR)

United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679

HOME PAGE: http://www.CESifo.de

Columbia University ( email )

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New York, NY
United States

Independent Economic Adviser ( email )

Independent ( email )

Douglas D. Purvis

Queens University (Deceased)

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