Macroeconomic Shocks and Trade Balance Adjustments in Papua New Guinea

25 Pages Posted: 25 Apr 2019

See all articles by Bao Nguyen

Bao Nguyen

School of Economics, University of Economics Ho Chi Minh City (UEH), Vietnam; Development Policy Centre, Crawford School of Public Policy, ANU; Centre for Applied Macroeconomic Analysis, ANU

Dek Joe Sum

Development Policy Centre, Crawford School of Public Policy, Australian National University (ANU); University of Papua New Guinea - Division of Economics, School of Business and Public Policy

Date Written: March 26, 2019

Abstract

Previous studies have mostly focused on the relationship between macroeconomic shocks and trade balance adjustments of resource-rich countries while largely overlooked countries with trade composition of high resource-export and strong import-dependence such as Papua New Guinea. Utilising a Bayesian Vector Autoregressive (BVAR) model, we quantify the relative importance of macroeconomic shocks on the country’s trade balance adjustments and examine how they evolve over time. Our identification strategy takes advantage of the fact that shocks generated from the resource sector and non-resource sector would have heterogeneous impacts on trade activity. We document that at a different point in time, all identified shocks except inflation contributed significantly to the fluctuations in trade balance with varying magnitude. The impulse responses show that one standard deviation of devaluation in the real exchange rate and resource boom lead to an immediate improvement in the trade balance. Shocks in the non-resource sector and inflation are found to have a positive impact on the trade balance, but they are mostly statistically insignificant.

Keywords: Bayesian VAR, trade balance, resource-rich developing countries, import-dependent, Papua New Guinea

JEL Classification: F31, F32, F14, F41

Suggested Citation

Nguyen, Bao and Sum, Dek Joe, Macroeconomic Shocks and Trade Balance Adjustments in Papua New Guinea (March 26, 2019). Development Policy Centre Discussion Paper No. 79. Available at SSRN: https://ssrn.com/abstract=3360721 or http://dx.doi.org/10.2139/ssrn.3360721

Bao Nguyen (Contact Author)

School of Economics, University of Economics Ho Chi Minh City (UEH), Vietnam; Development Policy Centre, Crawford School of Public Policy, ANU; Centre for Applied Macroeconomic Analysis, ANU ( email )

Dek Joe Sum

Development Policy Centre, Crawford School of Public Policy, Australian National University (ANU) ( email )

7 Liversidge Street (Bld 70)
Lennox Crossing
Canberra, 0200
Australia

HOME PAGE: http://https://crawford.anu.edu.au/people/academic/dek-sum

University of Papua New Guinea - Division of Economics, School of Business and Public Policy ( email )

P.O. Box 320, University Post Office
National Capital District
Papua
Guinea

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