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The Dutch Disease in Reverse: Iceland's Natural Experiment

Author

Listed:
  • Thorvaldur Gylfason
  • Gylfi Zoega
Abstract
For a long time, abundant natural resources brought Iceland a high and volatile real exchange rate with adverse effects on manufacturing and services. During 2003-2008, another national treasure, the sovereign’s AAA rating, was used by privatized banks to attract foreign capital, elevating the real exchange rate even further. The financial collapse and the associated collapse of the currency in 2008 left the country with a large foreign debt which offset some of the effect of the natural resources on the real exchange rate. In effect, this was the Dutch disease in reverse as witnessed, in particular, by a massive increase in the number of tourists following the financial collapse. This paper discusses the behavior of the exchange rate of the Icelandic króna before and after 2008 as well as its relationship to natural resources, capital flows, output, exports and imports, including tourism.

Suggested Citation

  • Thorvaldur Gylfason & Gylfi Zoega, 2017. "The Dutch Disease in Reverse: Iceland's Natural Experiment," CESifo Working Paper Series 6513, CESifo.
    • Handle: RePEc:ces:ceswps:_6513
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp6513.pdf
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    More about this item

    Keywords

    natural resource curse; Dutch disease; financial crisis;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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