The Dutch Disease in Reverse: Iceland's Natural Experiment

Abundant natural resources brought Iceland a systemically overvalued currency, with adverse effects on the secondary tradable sector. During 2003-08 another national treasure the sovereign's AAA rating, was used to attract foreign capital, elevating the real exchange rate even further. The fina...

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Bibliographic Details
Published inIDEAS Working Paper Series from RePEc
Main Authors Gylfason, Thorvaldur, Gylfi Zoega
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2014
Subjects
Foreign exchange rates
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Summary:Abundant natural resources brought Iceland a systemically overvalued currency, with adverse effects on the secondary tradable sector. During 2003-08 another national treasure the sovereign's AAA rating, was used to attract foreign capital, elevating the real exchange rate even further. The financial collapse in 2008 left the country with a large foreign debt without the possibility of rollovers in international capital markets. This offset some of the effect of the natural resources on the real exchange rate; in effect, this was the Dutch disease in reverse as witnessed, in particular, by a massive increase in the number of tourists in recent years.