TY - BOOK ID - 78437639 TI - Foreign Exchange Intervention and the Dutch Disease AU - Faltermeier, Julia. AU - Lama, Ruy. AU - Medina, Juan. PY - 2017 SN - 10185941 SN - 1475589336 9781475589337 1475589239 9781475589238 147558931X PB - Washington, D.C. : International Monetary Fund, DB - UniCat KW - Foreign exchange rates. KW - Foreign exchange rates KW - Monetary policy KW - International finance KW - International monetary system KW - International money KW - Finance KW - International economic relations KW - Exchange rates KW - Fixed exchange rates KW - Flexible exchange rates KW - Floating exchange rates KW - Fluctuating exchange rates KW - Foreign exchange KW - Rates of exchange KW - Econometric models. KW - Rates KW - Investments: Energy KW - Foreign Exchange KW - Macroeconomics KW - Economic Theory KW - Commodity Markets KW - Resource Booms KW - Central Banks and Their Policies KW - Open Economy Macroeconomics KW - Currency KW - Economic theory & philosophy KW - Investment & securities KW - Commodity prices KW - Dutch disease KW - Commodity booms KW - Prices KW - Economic theory KW - Commodities KW - Economic forecasting KW - Commercial products KW - Brazil UR - https://www.unicat.be/uniCat?func=search&query=sysid:78437639 AB - We study the optimal foreign exchange (FX) intervention policy in response to a positive terms of trade shock and associated Dutch disease episode in a small open economy model. We find that during a Dutch disease episode tradable production drops below the socially optimal level, resulting in lower welfare under learningby- doing (LBD) externalities. FX reserves accumulation improves welfare by preventing a large appreciation of the real exchange rate and by inducing an efficient reallocation between the tradable and non-tradable sectors. For an empirically plausible parametrization of LBD externalities, the model predicts that in response to a 10 percent increase in commodity prices FX reserves should increase by 1.5 percent of GDP. We also find that the welfare gains from optimally using FX reserves are twice as high as the gains from relying only on monetary policy. These results suggest that FX intervention is a beneficial policy to counteract the loss of competitiveness during a Dutch disease episode. ER -