Shocks to Terms of Trade and Risk-Premium in an Intertemporal Model: The Dutch Disease and a Dutch Party.

Journal article

In this paper, we analyze the impact of terms of trade and risk-premium shocks on a small open economy in an intertemporal Dutch disease model, with international capital mobility. Given that an improvement in the terms of trade is associated with a decrease in the risk-premium on lending to this economy, we find that this can lead to a Dutch party (rather than Dutch disease) in which real exchange rate appreciation is associated with an expansion of the capital-intensive traded sector, hence, pro-industrialization. The economy also accumulates more debt in the long-run in response to the lower borrowing costs.

Authors: Kuralbayeva, K; Vines, D

• Journal: Open Economies Review
• Volume: 19
• Publication date: 2008-01-01
• ISSN: 0923-7992
• Language: English