Working Paper: NBER ID: w0852
Authors: Michael Eruno; Jeffrey Sachs
Abstract: It is well known that a domestic resource discovery gives rise to wealth effects that cause a squeeze of the tradeable good sector of an open economy. The decline of the manufacturing sector following an energy discovery has been termed the "Dutch disease," and has been investigated in many recent studies. Our model extends the principally static analyses to date by allowing for: (1 ) short-run capital specificity and long-run capital mobility; (2) inter- national capital flows; and (3) far-sighted intertemporal optimizing behavior by households and firms. The model is solved by numerical simulation.
Keywords: Dutch disease; resource allocation; dynamic model; macroeconomic effects
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Domestic resource discovery (Q33) | Increased wealth (D31) |
| Increased wealth (D31) | Demand shift towards non-tradeable goods (F69) |
| Demand shift towards non-tradeable goods (F69) | Decline in tradeable goods sector (F19) |
| Increased wealth (D31) | Current account imbalances (F32) |
| Current account imbalances (F32) | Borrowing from abroad (F34) |
| Increased wealth (D31) | Lending abroad (F34) |
| Increased wealth (D31) | Capital accumulation in non-tradeable sector (E22) |
| Decline in tradeable goods sector (F19) | Capital decumulation (E21) |
| Increased wealth (D31) | Investment decisions over time (G11) |
| Investment decisions over time (G11) | Current economic conditions (E66) |