Working Paper: NBER ID: w0814
Authors: Michael Bruno
Abstract: The resource boom effect and the input price effect of raw material price changes are analyzed within a two-period, two-sector (plus resource industry), open economy framework. Diagrammatic exposition is used to study the 'Dutch disease', and in particular the distinction between the short term wealth effects (causing a real appreciation and a movement of variable factors from tradable to non-tradable industries) and between the long-run effects on total investment, its sectoral allocation and its finance by foreign borrowing. The framework further enables analysis of the different allocational effects of temporary versus permanent raw material price increases, when the two sectors differ in material use. Also discussed are the effects of changes in the world interest rate on factor allocation and foreign borrowing as well as the allocational effects of government intervention in the case of temporary real wage rigidity.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in raw material prices (Q02) | Real appreciation of nontradable goods (H49) |
| Real appreciation of nontradable goods (H49) | Shift of variable factors from tradable to nontradable industries (F16) |
| Permanent increases in raw material prices (Q31) | Long-term changes in total investment (E22) |
| Permanent increases in raw material prices (Q31) | Long-term changes in sectoral allocation (J29) |
| Permanent increases in raw material prices (Q31) | Long-term changes in financing through foreign borrowing (F65) |
| Price changes (P22) | Investment behavior (G11) |
| Government interventions (E65) | Investment behavior (G11) |
| Interest rates (E43) | Factor allocation (D33) |