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Sovereign risk and Dutch disease

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  • Esquivel, Carlos

Abstract

I study how, in the presence of default risk, the Dutch disease amplifies an inefficiency in the sectoral allocation of capital. In a sovereign default model with commodities and production of traded and non-traded goods, default incentives increase when more capital is allocated to non-traded production. Households do not internalize this, giving rise to an inefficiently large non-traded sector. Commodity windfalls amplify this inefficiency through the classic Dutch disease mechanism. I characterize state-contingent subsidies that implement the efficient allocation and compare them to a simpler subsidy rule that ameliorates the externality. Evidence from spreads, natural-resource rents, and sectoral investment data support the main findings of the model.

Suggested Citation

  • Esquivel, Carlos, 2025. "Sovereign risk and Dutch disease," Journal of Monetary Economics, Elsevier, vol. 149(C).
    • Handle: RePEc:eee:moneco:v:149:y:2025:i:c:s0304393224001168
    DOI: 10.1016/j.jmoneco.2024.103663
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    More about this item

    Keywords

    Sovereign default; Dutch disease; Investment inefficiencies;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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