The Macroeconomic Effects of Natural Resource Extraction: Applications to Papua New Guinea

38 Pages Posted: 21 Jun 2013

See all articles by Suman Sambha Basu

Suman Sambha Basu

International Monetary Fund (IMF)

Jan Gottschalk

International Monetary Fund (IMF) - Policy Development and Review Department

Werner Schule

International Monetary Fund (IMF)

Nikhil Vellodi

New York University, Department of Economics

Shu-Chun Susan Yang

International Monetary Fund (IMF)

Date Written: May 2013

Abstract

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

Basu, Suman Sambha and Gottschalk, Jan and Schule, Werner and Vellodi, Nikhil and Yang, Shu-Chun Susan, The Macroeconomic Effects of Natural Resource Extraction: Applications to Papua New Guinea (May 2013). IMF Working Paper No. 13/138. Available at SSRN: https://ssrn.com/abstract=2282973

Suman Sambha Basu (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Jan Gottschalk

International Monetary Fund (IMF) - Policy Development and Review Department ( email )

700 19th St. NW
Washington, DC 20431
United States

Werner Schule

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Nikhil Vellodi

New York University, Department of Economics ( email )

19 West 4th Street
New York, NY 10012
United States

HOME PAGE: http://https://sites.google.com/site/nvellodi/home

Shu-Chun Susan Yang

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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