Tuesday, May 27, 2014

The Dutch Disease in Reverse: Iceland’s Natural Experiment

OxCarre WP: Abundant natural resources brought Iceland a systemically overvalued currency, with adverse
effects on the secondary tradable sector. During 2003-2008 another national treasure, the sovereign’s AAA rating, was used to attract foreign capital, elevating the real exchange rate even further. The financial collapse in 2008 left the country with a large foreign debt without the possibility of rollovers in international capital markets. This 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 in recent years.

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