determinants of the equilibrium real exchange rate n b professor neary was based at university college dublin and queen s university ontario canada when this article was first published the full text of this article is not available in ora at this time citation neary j p 1988 determinants of the equilibrium real exchange rate american economic review 78 1 210 215

the theory of domestic content protection and content preference this paper investigates the resource reallocation effected by content protection and content preference schemes under alternative assumptions regarding the definition of domestic content the number of intermediate goods and the market structure of the domestic intermediate good industry content protection is shown to be equivalent to a combination of more familiar commercial policies however the extent of application of these policies is determined endogenously by parameters of the production functions for intermediate and final goods a number of anomalous and undesirable outcomes that may result from content protection and content preference are discussed

the macroeconomic implications of a resource discovery in an open economy this paper analyses the macroeconomic impact on an economy of the discovery of significant quantities of a natural resource the resource will be termed oil and the analysis is intended to be suggestive of the effects on the u k economy of the discovery of north sea oil and of possible policy responses our motivation is what appears to be an inconsistency between the commonly expressed view that north sea oil has generated unemployment by causing the exchange rate to appreciate2 and the contention of proponents of the new classical macroeconomics that the oil discovery creates no special macroeconomic problems 3 in order to abstract from microeconomic questions we shall assume that oil is perfectly tradable and that there are no extraction costs 4 we also assume that the foreign currency oil price is exogenous and rises at the foreign interest rate the effect of these assumptions is that for the economy as a whole the oil discovery can be considered as a foreign exchange windfall of fixed magnitude and we define the term oil revenue in a permanent income sense as the infinite term foreign exchange annuity value of this windfall oil revenue as defined is independent of depletion policy it accrues whether or not depletion is occurring at any date since it includes capital gains on the oil stock and depends in no way on whether the oil is exported or used domestically it will be assumed throughout that the economy operates with a flexible exchange rate and that international capital mobility is perfect at the date of discovery the economy is assumed to be at zero inflation full employment with both current and capital accounts balanced we are primarily interested in the dynamics of adjustment to the oil discovery but comparative static analysis5 provides a convenient point of departure for this purpose only we suppose that depletion is managed so as actually to realise the oil revenue each year if all the oil revenue is saved then there are no effects on demand prices or

absorbing a windfall of foreign exchange dutch disease dynamics abstract the permanent income rule is seldom the optimal response to a windfall of foreign exchange such as that from a resource discovery absorptive capacity constraints require domestic investment and investment in structures requires non traded inputs the supply of which is constrained by the initial capital stock this particularly when combined with intra sectoral capital immobility delays adjustment and creates short run dutch disease symptoms as the real exchange rate sharply appreciates and overshoots its long run value optimal revenue management requires investing in the domestic non traded goods sector and a slow build up of consumption accumulation of foreign assets adjusts to accommodate the time paths of domestic consumption and investment

the value of fiscal discipline for oil exporting countries abstract the value of fiscal discipline is assessed by analyzing the role of fiscal policy as a transmission mechanism of oil price shocks in oil exporting small open economies fiscal policy is an important propagation channel taking policy as given by the data the model can successfully explain the responses of key macroeconomic variables but it is unable to explain these responses under counterfactual fiscal frameworks interestingly fiscal policy also seems capable of regulating the size of pass through furthermore fiscal policies that insulate the economy from oil price shocks seem to be welfare improving over procyclical ones

the impact of natural resources survey of recent quantitative evidence the cross country empirical evidence for the natural resource curse is ample but unfortunately fraught with econometric difficulties a recent wave of studies on measuring the impact of natural resource windfalls on the economy exploits novel datasets such as giant oil discoveries to identify effects of windfalls uses natural experiments and within country econometric analysis and estimates local impacts these studies offer more hope in the search of quantitative evidence

optimal dutch disease growth models of the dutch disease such as those of krugman 1987 matsuyama 1992 sachs and warner 1995 and gylfason et al 1999 explain why resource abundance may reduce growth however the literature also raises a new question if the use of resource wealth hurts productivity growth how should such wealth be optimally managed this question forms the topic of the present paper in which we extend the growth literature on the dutch disease from a positive to a normative setting we show that the assumptions in the previous literature imply that the optimal share of national wealth consumed in each period needs to be adjusted down however some dutch disease is always optimal thus lower growth in resource abundant countries may not be a problem in itself but may be part of an optimal growth path the optimal spending path of the resource wealth may be increasing or decreasing over time and we discuss why this is the case

welfare maximizing and revenue maximizing tariffs with a few domestic firms in this paper we compare the orthodox optimal tariff formula with the appropriate welfare maximizing tariff when there are a few producing or importing firms the welfare maximizing tariff can be very low voire negative in some cases while in others it can even exceed the maximum revenue tariff the relationship between the welfare maximizing tariff and the number of firms need not be monotonically increasing because the tariff is not strictly used to internalize terms of trade externality it is also used to manipulate cost asym metries between producing and importing firms welfare maximizing specific tariffs are never worse than their ad valorem counterparts jel classification f13 l13

the dutch disease a disease after all many third world oil producers are encountering serious problems in building up a diversified export base while west european oil and gas producers netherlands united kingdom are suffering a decline in their traded goods manufacturing sector induced by real wage pressures it is becoming increasingly clear that high but temporary oil revenues may be somewhat ora mixed blessing the quip of the economist notwithstanding the mechanism behind this unbalance is clear enough part of the oil revenues is spent on non traded goods which leads to a real appreciation i e a rise in the relative price of non traded goods in terms of traded goods this in turn draws resources out of the non oil traded sector into the non traded goods producing sector corden and neary 1982 van wijnbergen 1980 one may say that this is an efficient response to the increase in income from oil production the united kingdom mexico egypt simply should move into oil derived industries and non traded goods and forget about their manufacturing sector until oil reserves are exhausted however many developing countries are hesitant to take this advice after all the post world war ii success stories in economic development involve without exception countries that promoted their traded goods sector aggressively moreover it is a well established stylised fact that technological progress is faster in the traded non sheltered sectors of an economy than in the non traded sector balassa 1964 is an early reference considering the hypothesis that technological progress rather than taking place exogenously with the passage of time is a function of accumulated experience the concern of countries like egypt mexico or indonesia is much easier to understand since solow 1957 and denison 1962 it is known that capital accumulation explain only a small part of economic growth if most of economic growth is caused by learning by doing induced technologica

import sensitive products and perverse tariff rate quota liberalization this paper shows that a tariff rate quota s trq minimum access expansion can perversely trigger domestic price increases often trqs have prohibitive over quota tariffs to mimic import quotas in providing minimum market access in the wto s doha round it is likely that countries using trqs will avoid aggressive tariff reductions if they increase the quota portion of trqs we show that when the import price lies between the unit cost of production and the price received by domestic upstream firms an increase in import quota as a share of domestic production may cause an increase in the domestic retail price une expansion de l acces minimum au marche d un contingent tarifaire ct peut generer des augmentations perverses de prix internes souvent les ct ont des tarifs hors contingent prohibitifs pour reproduire les effets des quotas a l importation tout en garantissant un acces minimum au marche dans le cycle de doha de l omc il est probable que les pays utilisant des ct vont pouvoir eviter des reductions importantes de tarifs si le contingent des ct est augmente nous montrons qu une augmentation du contingent defini comme une fraction de la production interne peut engendrer une augmentation du prix interne des detaillants si le prix des importations se situe entre le cout unitaire de production et le prix interne des firmes en amont

a flexible multistage demand system based on indirect separability the notion of indirect separability is exploited to derive a new multistage demand system the model allows a consistent parameterization of demand relations at various budgeting stages and it fulfills the requirement of flexibility while satisfying separability globally two propositions are derived to characterize flexible and separable functional forms which lead to the specification of a flexible and separable translog fast demand system the model is particularly attractive for modeling large complete demand systems and is illustrated with an application

using natural resources for development why has it proven so difficult developing economies have found it hard to use natural resource wealth to improve their economic performance utilizing resource endowments is a multistage economic and political problem that requires private investment to discover and extract the resource fiscal regimes to capture revenue judicious spending and investment decisions and policies to manage volatility and mitigate adverse impacts on the rest of the economy experience is mixed with some successes such as botswana and malaysia and more failures this paper reviews the challenges that are faced in successfully managing resource wealth the evidence on country performance and the reasons for disappointing results

sleeping quotas pre emptive quota bidding and monopoly power abstract we rationalize the puzzling existence of binding quotas that are not fully utilized our model has its roots in bhagwati 1965 in r baldwin et al eds trade growth and the balance of payments essays in honor of g haberler mit press new york on tariffs quotas equivalence and is related to the io literature on preemption we study the conditions that lead a monopolist facing a quota restricted market to buy the quota licenses itself and the conditions under which they may remain unused the divisibility of the quota is crucial for the monopolist to pre emptively buy the quota furthermore we study the implications of use it orlose it clauses commonly imposed on auctioned quotas

a note on the protective effect of tariffs and quotas under uncertainty abstract sufficient conditions are given for any tariff or quota to be protective under uncertainty where assets are not traded internationally and commodities are traded it is shown that if both goods are normal goods then any small tariff or quota is protective even if it varies with the random state of nature a sufficient condition is also given for large trade restrictions to be protective under uncertainty these results thus generalize those of helpman and razin who showed that when both goods are normal goods a small ad valorem tariff which is independent of the state of nature is protective

harnessing windfall revenues optimal policies for resource rich developing economies a windfall of natural resource revenue or foreign aid faces government with choices of how to manage public debt investment and the distribution of funds for consumption particularly if the windfall is both anticipated and temporary we show that the permanent income hypothesis prescription of an ever lasting increase in consumption financed by borrowing ahead of the windfall and then accumulating a sovereign wealth fund swf is not optimal for capital scarce developing economies such countries should accumulate public and private capital to accelerate their development and only if the windfall is large relative to initial foreign debt is it optimal to build a swf the optimal time profile of consumption is biased towards the near future as compared to the permanent income hypothesis outcomes depend on instruments available to government we study cases where the government can make lump sum transfers to consumers where such transfers are impossible so optimal policy involves cutting distortionary taxation in order to raise investment and wages and where ricardian consumers can borrow against future revenues in which case the policy response to possible over consumption is a high level of investment in infrastructure

inflation employment and the dutch disease in oil exporting countries a short run disequilibrium analysis the author uses nontraded goods and labor shortages in the gulf countries the decline of the traded goods sector in oil producers dutch disease and the absence of employment benefits of higher oil revenues in latin american oil producers higher oil revenues can be likened to a transfer putting pressure on non oil traded nt goods prices and drawing resources out of the t sector the slope of the wage indexation line determines whether classical unemployment or repressed inflation results various policy measures are analyzed 3 references 8 figures

can an oil discovery lead to a recession a comment on eastwood and venables in a recent paper in this journal eastwood and venables ev present an analysis of the macroeconomic consequence of an oil discovery in an open economy model which assumes perfect international capital mobility rational exchange rate expectations and sluggish adjustment of domestic goods prices in this note the authors attempt to reconcile this apparent contradiction in the literature in particular the authors show that ev s results hinge crucially on their failure to allow for a direct impact of higher oil wealth on money demand even when all the oil revenue accrues to the government this should raise private sector wealth through the anticipated reduction in future tax liabilities in any case the authors find it difficult to conceive a situation in which an oil discovery will raise spending but leave money demand permanently unaffected the purpose of this note is to show the important implications of this observation for the effects of an oil discovery when appropriate monetary accommodation does not take place

booming sector and de industrialisation in a small open economy this paper presents a theoretical analysis of the dutch disease the phenomenon whereby a boom in one traded goods sector squeezes porfitability in other traded goods sectors both by directly bi

compositional standards import permits and market structure the case of canadian cheese imports the imposition of cheese compositional standards by the canadian authorities has created divisions within the canadian dairy industry and has motivated criticisms from several of canada s trade partners the standards impose minimum limits on the percentage of casein coming from fluid milk we develop a theoretical model to investigate the implications of canada s compositional cheese standards while accounting for canada s trade policy we illustrate why a type of cheese that is not directly impacted by the standards might be the most affected we show that the standards can decrease the domestic demand for milk or the value of imports our empirical investigation identified breaks in the processes determining import unit values shortly before or shortly after the beginning of the implementation of the standards

macro policy responses to natural resource windfalls and the crash in commodity prices policy prescriptions for managing natural resource windfalls are based on the permanent income hypothesis none of the windfall is invested at home and saving in an intergenerational swf is dictated by smoothing consumption across different generations furthermore with dutch disease effects the optimal response is to intertemporally smooth the real exchange rate smooth public and private consumption and limit sharp fluctuations in the intersectoral allocation of production factors we show that these prescriptions need to be modified for the following reasons first to cope with volatile commodity prices precautionary buffers should be put in a stabilisation fund second with imperfect access to capital markets the windfall must be used to curb capital scarcity invest domestically and bring consumption forward third with real wage rigidity consumption must also be brought forward to mitigate transient unemployment fourth the real exchange rate has to temporarily appreciate to signal the need to invest in the domestic economy to gradually improve the ability to absorb the extra spending from the windfall fifth with finite lives the timing of handing back the windfall to the private sector matters and consumption and the real exchange rate will be volatile finally with nominal wage rigidity we show that a taylor rule is a better short run response to a crash in commodity prices than a nominal exchange rate peg

endogenous policy and supply management in a post gatt world previous studies of the effects of agricultural trade policy reform have treated internal policies for supply managed commodities as exogenous in our model however quotas on imports are chosen jointly with domestic production quotas to balance total wel fare and its distribution among producers consumers importers and taxpayers gatt and nafta regulations impose minimum import access requirements on supply managed com modities we show the unintended consequences of these regulations which arise from the induced adjustment of domestic quota policies using canadian supply management as an example

import now an analysis of market share voluntary import expansions vies abstract proponents claim that voluntary import expansions vies increase foreign access to a domestic market while increasing competition and reducing prices using a bertrand model i show that a vie produces exactly the opposite results a vie that increases the market share of imports above the prevailing level results in higher prices in the domestic market this result holds even when the domestic market is assumed to be protected by a tariff type barrier prior to the imposition of a vie a vie and an equivalent import subsidy are shown to have opposite effects on prices

hidden costs of supply management in a small market canada regulates its dairy and poultry industries through supply management the supply management programs use target prices production quotas and import tariff rate quotas to raise domestic prices canadian supply managed producers cannot export their output to world markets as exports would be considered subsidized under world trade organization rules in this paper we show that once foregone export opportunities are accounted for supply management may no longer be beneficial to domestic producers of the supply managed commodities the extent to which foregone profits from exports dominate domestic rents depends on canada s comparative advantage domestic market elasticities and the extent of supply management distortion in the domestic market