Is Exchange Rate Stabilization a+L4510n Appropriate Cure for the Dutch Disease?

Download or read book Is Exchange Rate Stabilization a+L4510n Appropriate Cure for the Dutch Disease? written by Juan Pablo Medina Guzman and published by International Monetary Fund. This book was released on 2010-08-01 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper evaluates how successful is a policy of exchange rate stabilization to counteract the negative effects of a Dutch Disease episode. We consider a small open economy model that incorporates nominal rigidities and a learning-by-doing externality in the tradable sector. The paper shows that leaning against an appreciated exchange rate can prevent an inefficient loss of tradable output but at the cost of generating a misallocation of resources in other sectors of the economy. The paper also finds that welfare is a decreasing function of exchange rate intervention. These results suggest that stabilizing the nominal exchange rate in response to a Dutch Disease episode is highly distortionary.