Abstract
Abstract We estimate the effect of giant oil and gas discoveries on bilateral real exchange rates. A giant discovery with the value of 10% of a country’s GDP appreciates the real exchange rate by 1.5% within ten years following the discovery. The appreciation starts before production begins and the non-traded component of the real exchange rate drives the appreciation. Labour reallocates from the traded goods sector to the non-traded goods sector, leading to changes in labour productivity. These findings provide direct evidence on the channels central to the theories of the Dutch disease and the Balassa–Samuelson effect.
Highlights
We estimate the effect of giant oil and gas discoveries on bilateral real exchange rates
The Dutch disease theory and the Balassa–Samuelson hypothesis predict that a key mechanism through which economies adjust to windfalls or productivity shocks in the traded sector is an appreciation of the real exchange rate (Balassa, 1964; Samuelson, 1964; Corden and Neary, 1982; Eastwood and Venables, 1982; Corden, 1984)
We focus on labour productivity both because models of Dutch disease offer stark predictions with respect to this measure and because—lacking sufficiently high-quality wage data going back to 1970—under minimal assumptions these measures can be interpreted as constant-price sectoral wages
Summary
The appreciation of the real exchange rate is at the core of Dutch disease theories and is often considered to be responsible for the deterioration of the tradable goods sector, i.e., manufacturing. We identify and quantify the cumulative effect of giant discoveries on the real exchange rate and its tradable and non-tradable goods component
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