The Macroeconomic Effects of Natural Resource Extraction: Applications to Papua New Guinea
38 Pages Posted: 21 Jun 2013
Date Written: May 2013
To investigate the effects on Papua New Guinea’s economy of substantial liquified natural gas revenues arriving in 2015, we employ a model to examine the macroeconomic effects of a scalingup of natural resource windfall revenues and the implications for a variety of policy responses. The model is a multi-sector dynamic stochastic general equilibrium (DSGE) model, and features components that allow for a detailed study of the effects of both fiscal and monetary policy in response to a positive shock to the mineral resource value of a country. The model contains tradable, non-tradable, and mining sectors, as well as an independent central bank and fiscal authority. We calibrate the model to the current economy of Papua New Guinea and run a suite of policy simulations. We find that macroeconomic effects from a resource boom typically associated with Dutch Disease effects such as a real appreciation and a fall in tradable sector production stem largely from the non-tradable component of government spending. The central bank can offset the real appreciation, but not without crowding out the private sector. A sovereign wealth fund (SWF), combined with a smooth capital spending path, entails the best means of dealing with macroeconomic volatility and maintaining a stable fiscal regime.
Keywords: Natural resources, Papua New Guinea, Fiscal policy, Current account deficits, Government expenditures, Monetary policy, Reserves accumulation, Economic models, monetary policy, natural resource, resource-rich developing countries, DSGE models, central bank, inflation, foreign exchange, money supply, monetary fund, relative price, money balance, reserve management policy, real money, money growth, money demand, monetary economics, domestic money supply, monetary policy objectives, open market operations, monetary economy, inflationary pressures, inflation rate, increase in inflation, nominal interest rate, real interest rates, independent central bank, real interest rate, interest rate target
JEL Classification: Q32, E22, F43, O41
Suggested Citation: Suggested Citation