Energy and Resource Allocation: A Dynamic Model of the "Dutch Disease"
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) international capital flows; and (3) far-sighted intertemporal optimizing behavior by households and firms. The model is solved by numerical simulation.
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More About This Work
This paper was presented at the Conference of Unemployment, New College, Cambridge, July 1981, under the original title "Input Price Shocks and the Slowdown in Economic Growth, Part II." The paper is part of a joint study of the authors on the macroeconomic effects of supply shocks. Published in Review of Economic Studies, vol. 49, no. 5 (January 1982), pp. 845-859.