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Capital Inflows, Dutch Disease Effects, and Monetary Policy in a Small Open Economy
Author(s) -
Lartey Emmanuel K. K.
Publication year - 2008
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.2008.00762.x
Subject(s) - economics , monetary policy , dutch disease , exchange rate , monetary economics , exchange rate flexibility , small open economy , open economy , macroeconomics , welfare , interest rate , nominal interest rate , capital (architecture) , taylor rule , exchange rate regime , real interest rate , central bank , market economy , archaeology , history
This paper studies the role of monetary policy in a small open economy that experiences Dutch disease effects as a result of capital inflows, and examines the issue of whether such a policy should seek to address these effects from a welfare perspective. I find that Dutch disease effects occur under a fixed nominal exchange rate regime. However, a monetary policy regime characterized by generalized Taylor interest rate rules featuring either the real exchange rate or the nominal exchange rate avert Dutch disease effects. Welfare results reveal that the optimal rule is a generalized Taylor rule consistent with nominal exchange rate flexibility.