Boom Goes the Price: Giant Resource Discoveries and Real Exchange Rate Appreciation

We estimate the effect of giant oil and gas discoveries on bilateral real exchange rates. The size and plausibly exogenous timing of such discoveries make them ideal for identifying the effects of a resource boom on prices. We find that a giant discovery with the value of 10% of a country's GDP appreciates the real exchange rate by 1.5% within 10 years following the discovery. Importantly, a significant part of the appreciation occurs before production starts and the appreciation is driven by the non-traded component of the real exchange rate. Moreover, we show that labor reallocates from the traded goods sector to the non-traded goods sector leading to changes in labor productivity in the respective sectors. Our findings provide direct evidence on the channels central to the theories of the Dutch disease and the Balassa-Samuelson effect.