On Dutch disease and its neutralization: a classical perspective
  • 1 Central Bank of Argentina (BCRA), National Scientific and Technical Research Council (CONICET) and Universidad Nacional de San Martín (UNSAM), Buenos Aires, Argentina
  • | 2 Central Bank of Argentina (BCRA) and Universidad Nacional de San Martín (UNSAM), Buenos Aires, Argentina

A particularly influential group among heterodox economists argues that a ‘competitive’ real exchange rate by itself triggers economic growth. New Developmentalism, a sub-group within this broader view, makes a valuable contribution to the discussion by assigning two different roles to the ‘competitive’ or ‘equilibrium’ exchange rate: first, it acts as a ‘light switch’ by allowing tradable sectors that employ ‘state of the art’ technology to earn the normal profit rate of the economy by selling their goods in global markets. And, second, to ensure that domestic firms have ‘access to foreign demand’, growth is accelerated through several mechanisms. This paper exclusively focuses on the first role, which has received much less attention in the literature. To do so, the authors present a formal framework inspired by the classical approach to prices and distribution that (a) captures the idea of the exchange rate as a ‘light-switch’ and (b) allows the examination of the scopes and limits of the concept of ‘Dutch disease’, the main structural feature that, according to New Developmentalism, may cause the systematic overvaluation of the exchange rate.

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