Abstract
ABSTRACT This paper analyses the Dutch disease hypothesis in the context of the manufacturing sectors of two resource-rich countries, Norway and the UK, during the period 1978 - 2013. We first formulate a theoretical model of the Dutch disease phenomenon, taking the exchange rates as endogenous. Then, through a series of VECMs, we study the effect of energy production, real exchange rate, world oil prices, real GDP and financial development on manufacturing production in each country under consideration. We conduct tests for cointegration, specify VECMs, and check for misspecification. We also run a VAR model to check for Granger causality between the manufacturing output and energy production, real exchange rate and world oil prices. Based on the IRFs, we also study the effects of different shocks on manufacturing production. Our findings confirm the Dutch disease hypothesis for Norway but not in the UK. Yet, we find evidence of a different form of the Dutch disease in the UK, mainly a Dutch disease phenomenon originating from the large capital inflows in Europe’s financial capital. Keywords Dutch disease, Real exchange rate, Manufacturing sector, Energy production, GDP, Financial development, VECM, IFR
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