Resource Dependence, Commodity Shocks and the Role of the Exchange Rate: An Empirical Study of Papua New Guinea

Rubayat Chowdhury

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: The role of the exchange rate as a ‘shock absorber’ is often undermined in resource-dependent developing countries when a negative commodity price shock hits the economy. Rather than pursuing greater flexibility, the policymakers rely more on intervention strategies which further aggravates the balance of payment crisis by leading to a forex crisis. This paper presents an empirical study of Papua New Guinea which has been facing a severe shortage of foreign currency since 2013. It examines if a sudden depreciation shock to the exchange rate stimulates the overall trade balance while simultaneously evaluating its impact on inflation. Employing a structural vector autoregression model I find that the positive trade balance effect outweighs the negative inflationary effect. Further, I find external shocks as the major sources of real business cycles and a negative response of the non-resource economy to a positive resource shock.

Keywords: SVAR; natural resource; commodity shocks; forex market; exchange rate; devaluation; Papua New Guinea (search for similar items in EconPapers)
JEL-codes: C51 E32 F43 F62 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2022-08
New Economics Papers: this item is included in nep-opm
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2022-50

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