We estimate the effect of giant oil and gas discoveries on bilateral real exchange rates. 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. The appreciation starts before production starts and the non-traded component of the real exchange rate drives the appreciation. Labor reallocates from the traded goods sector to the non-traded goods sector, leading to changes in labor productivity. These findings provide direct evidence on the channels central to the theories of the Dutch disease and the Balassa-Samuelson effect.

No abstract

as well as members of the Minnesota International Trade and Development Workshop for helpful comments and suggestions. I thank Hossein Samiei and Kevin Cheng for initial discussion. I have also benefited from comments of seminar participants at the Sum