Recovery from Dutch Disease

Dutch Disease is thought to have ongoing negative effects on resource rich open
economies. There is little evidence on how economies recover. We document the
Australian case in the aftermath of the commodities price boom resulting from high input
demand from China. We show that where the boom is contained in an export-oriented,
small-employment sector of the economy and driven by external demand rather than
price shocks, the economy recovers to its equilibrium relatively quickly. To show this we
add a new tool to the SVAR toolbox which enables us to assess the source of deviations
in the observed outcomes from an empirical steady-state implied by the model.