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Dealing with the Dutch disease: Fiscal rules and macro-prudential policies

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  • García-Cicco, Javier
  • Kawamura, Enrique
Abstract
We evaluate from a welfare perspective three policy alternatives frequently proposed to deal with Dutch-disease problems originated from cyclical movements in commodity prices. Namely, fiscal rules for government expenditures, capital controls, and taxes to domestic lending. To this end, we develop a DSGE model of a small open economy 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 first two features induce inefficient relocations after commodity shocks, while the later is relevant to study the role of fiscal rules. We calibrate the model using Chilean data, applying an impulse-response-matching approach. For each of the policy tools, we analyze optimal simple rules from a welfare (Ramsey) perspective, describing how different households rank the several policy alternatives, and studying how each of the models features shape the optimal policy design. A general conclusion of the analysis is that the included Dutch-disease inefficiencies are of limited quantitative relevance in analyzing the desirability of these policies from a welfare perspective.

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  • García-Cicco, Javier & Kawamura, Enrique, 2015. "Dealing with the Dutch disease: Fiscal rules and macro-prudential policies," Journal of International Money and Finance, Elsevier, vol. 55(C), pages 205-239.
    • Handle: RePEc:eee:jimfin:v:55:y:2015:i:c:p:205-239
    DOI: 10.1016/j.jimonfin.2015.02.009
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    More about this item

    Keywords

    Dutch-disease; Fiscal pro-cyclicality; Fiscal rules; Capital controls; Macro-prudential policies;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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