Dutch Disease, Unemployment and Structural Change

We build a multi-sector, open economy model that captures the effects of a commodity boom on
unemployment when there is also ongoing structural change. We use Bayesian methods to jointly
estimate transition path effects of structural change and business cycle dynamics. Applying our model to
the Australian economy, the estimates suggest that the large, permanent increase in commodity prices
of the 2000s is critical for the observed appreciation of the real exchange rate and the contraction of net
exports. Consistent with Dutch disease, the commodity boom increases unemployment in the short run.
But structural change in the form of shifting preferences over non-tradable consumption and non-tradable
employment, a process somewhat akin to structural transformation, explains the long-run reduction in
unemployment, the increasing importance of the non-tradable sector for aggregate fluctuations and the
increasing responsiveness of the tradable sector to shocks.