Oil export boom and Dutch-disease: A dynamic analysis

Abstract

This paper analyzes the extent to which a boom in a particular export sector (i.e., oil) affects competitiveness in the rest of the economy: This problem has sometimes been associated with the so-called ‘Dutch-disease’. The main conclusion of the analysis is that the ‘Dutch-disease’ is not a disease in any clear sense. It is shown that in a non-monetary economy a (permanent) increase in the price of oil will result in an equilibrium reduction of the price of traditional (non- oil) tradables both in terms of non-tradables and oil. This is a long-run real phenomenon that will result in resources moving out of the traditional tradable goods sector. It is also shown that if money is included into the model it is possible that relative prices will overshoot, and that the traditional tradables sector will have a greater loss of competitiveness in the short-run than in the long-run. Finally, the paper discusses some policy measures that will help avoid this relative price overshooting.