26 Pages Posted: 24 Feb 2017
Date Written: February 22, 2017
Papua New Guinea’s (PNG) resource boom has come to an end. Theory suggests that the real exchange rate (RER) should subsequently depreciate in order to restore internal and external balance. In practice, however, the imposition of foreign exchange controls has led to a large backlog in foreign currency orders suggesting that the RER is significantly overvalued. The purpose of this paper is to inform the ongoing policy debate surrounding this issue by estimating the extent to which PNG’s RER is currently misaligned. Our results suggest that the kina should depreciate by about 20% to close the gap between the actual and equilibrium value of the RER. Otherwise PNG is likely to pay high economic costs as real overvaluation sustained through foreign exchange restrictions led to resource misallocation, lower economic growth, black markets, and ultimately a balance of payments crisis in many other developing countries in the past.
Keywords: Natural Resource Boom, Macroeconomic Adjustment, Real Exchange Rate Misalignment, Exchange Rate Policy, Papua New Guinea
JEL Classification: F31, F41, O11, O13
Suggested Citation: Suggested Citation
Fox, Rohan and Schröder, Marcel, After Papua New Guinea's Resource Boom: Is the Kina Overvalued? (February 22, 2017). Development Policy Centre Discussion Paper No. 54. Available at SSRN: https://ssrn.com/abstract=2922206 or http://dx.doi.org/10.2139/ssrn.2922206