Dealing%20with%20the%20Dutch%20Disease%3A%20Fiscal%20Rules%20and%20Macro%2DPrudential%20Policies

Working Papers

Dealing with the Dutch Disease: Fiscal Rules and Macro-Prudential Policies


CODE: IDB-WP-562
AUTHOR(s): Kawamura, Enrique EDITOR(s): , García-Cicco, Javier
PUBLISHED: July 2015
LANGUAGE: English
RELATED TOPICS: Macroeconomics
DOWNLOAD FILE IN: English

Abstract:

This paper evaluates from a welfare perspective three policy alternatives for dealing with Dutch disease problems originating from cyclical movements in commodity prices: fiscal rules for government expenditures, capital controls, and taxes on domestic lending. A DSGE model of a small open economy is developed, with a sectoral decomposition that features three distinctive characteristics: financial frictions, a learning-by-doing externality in the industrial sector, and a fraction of households being non-Ricardian (credit constrained). The model is calibrated using Chilean data. For each policy tool, optimal simple rules are analyzed from a welfare (Ramsey) perspective, describing how different households rank the several policy alternatives, and studying how each of the models features shapes the optimal policy design. A general conclusion of the analysis is that the included Dutch disease inefficiencies are of quantitatively limited relevance in analyzing the desirability of these policies from a welfare perspective.

Related Research by JEL Codes:
(or click here to find research by JEL Codes)
  • Macroeconomic Effects of China’s Fiscal Stimulus
    Working Papers
    IDB-WP-211 - October 2010

    This paper analyzes the macroeconomic impact of China’s 2009-2010 fiscal stimulus package by simulating a dynamic general equilibrium multi-country model of the world economy, showing that the effects on China’s economic activity are sizeable: absent fiscal stimulus China’s GDP would be 2.6 and 0.6 percentage points lower in 2009 and 2010, respectively. The effects are stronger under a US dollar p ... (View publication)

  • Sharing a Ride on the Commodities Roller Coaster: Common Factors in Business Cycles of Emerging Economies
    Working Papers
    IDB-WP-640 - December 2015

    Fluctuations in commodity prices are an important driver of business cycles in small emerging market economies (EMEs). This paper documents how these fluctuations correlate strongly with the business cycle in EMEs. A commodity sector is then embedded into a multi-country EMEs business cycle model where exogenous fluctuations in commodity prices follow a common dynamic factor structure and coe ... (View publication)

  • On the Implications of Taxation for Investment, Savings and Growth: Evidence from Brazil, Chile and Mexico
    Working Papers
    IDB-WP-560 - April 2015

    This paper explores the qualitative and quantitative implications of taxation for growth and savings in three Latin American countries: Brazil, Chile and Mexico, studying a small open economy in the context of an endogenous growth model where the domestic interest rate depends on the level of domestic debt. The model's parameters are calibrated to the Brazilian, Chilean and Mexican economies. ... (View publication)

Hello, Welcome to the IDB!

Please join our mailing list by simply entering your email below.