A comparative study of five Dutch disease models: a thesis presented in partial fulfilment of the requirements for the degree of Master of Philosophy in Social Sciences at Massey University

Abstract

During the past decade, the sudden and sharp increases in oil prices, coupled with the discovery and extraction of oil in the North Sea, have contributed considerable interest in the macroeconomic problems of oil-exporting countries. It is well known that a domestic oil discovery can give rise to wealth effects that cause a squeeze in the traded goods sector of an open economy. The decline of the manufacturing sector following an oil discovery is termed the 'Dutch disease', and has been investigated in many recent studies which embody a general equilibrium model. This is detailed in Chapter One where the development of Dutch disease literature is discussed.

Despite the development of a wide range of the Dutch disease models, There is still a lack of consensus regarding the analysis on the issue of Dutch disease. This thesis aims to study a number of different models of the Dutch disease by focussing on the following considerations:

i) the underlying theoretical framework with reference to some main-stream economic theories, such as those based on Trade theory, Neoclassical and Keynesian traditions; ii) the assumptions made within each framework regarding monetary and supply-side conditions; iii) analysis of the various effects of exogenous disturbances on the economy; and iv) evaluation of the relationship between the underlying assumptions and the conclusions drawn from the model analysis.

Chapter Two outlines the classification of the Dutch disease model into three broad categories. These categories distinguish between the types of macroeconomic effects which give rise to the Dutch disease phenomenon. Detailed algebraic specification of each model, using standard notations developed for this thesis, along with the assumptions made are described in Chapter Three. Chapter Four is devoted to a comparative study of the models. In each section, two models are compared to draw out the differences in their assumptions and approach, and to show how these differences can affect their final conclusions about the effect of various exogenous disturbances. A summary of the main results of the comparative study is given in

Chapter Five. Some points for further research are also briefly discussed.