Longterm links between raw materials prices real

Authors: Pilar Poncela Eva Senra Lya Paola Sierra

Publish Date: 2016/03/29

Volume: 52, Issue: 2, Pages: 777-798

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Abstract

The term Dutch disease appears in relation to the Netherlands discovery of large gas deposits in the North Sea and its harmful effects on the country industrial sector The sudden increase in the country’s wealth created an inflow of capital never seen before which led to an appreciation of its currency and therefore a loss of competiveness in the nonenergy exporting sector The purpose of this article is to provide empirical evidence of Dutch disease in Colombia This country is different from other economies analyzed for Dutch disease since it has been dependent on two different commodities coffee first and oil lately Hence we focus on the longrun analysis and test by means of a vector error correction model whether commodity prices are related to the real exchange rate and the relative manufacturing output The longrun relations as well as the impulse response analysis clearly show that commodity prices are positively related to the real exchange rate Thus increases in commodity prices have a negative effect on the competitiveness of the country Our result also shows that public spending is a major source of pressure on the Colombian real exchange rateWe thank the participants of the XVI Applied Economics Meeting EEA for their useful comments Moreover we thank Sebastian Voigt for commenting this article at the 20th European Association of Environmental and Resource Economist EAERE The first and second authors acknowledge financial support from Spanish Ministry of Economy and Competitiveness Projects Numbers ECO201232854 and ECO201456676C22P respectively Support from the Pontificia Universidad Javeriana Cali to the third author is gratefully acknowledgedReal Exchange Rate SPANRER Authors’ calculations based on the Exchange Rate Index 2005 = 100 /Index Number /averages /exchange rate index /Cnt Colombia /Source IMF Wash CPI low and Middle Income Urban /Index Number /Base year 2005 /averages /Cnt Colombia /Source IMF Wash and CPI all Items City Average /Index Number /Base year 2005 /averages /Cnt United States /Source IMF WashingtonThe Balassa Samuelson or Productivity effect SPANPRODUCT Proxied by the ratio of the consumer price index CPI to the producer price index PPI CPI low and Middle Income Urban and PPI / Wpi /Index Numbers /Base year 2005 /averages /Cnt Colombia /Source IMF Washington

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