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External Adjustment in a Resource-Rich Economy: The Case of Papua New Guinea

Ryota Nakatani

No 17/267, IMF Working Papers from International Monetary Fund

Abstract: How should resource-rich economies handle the balance of payments adjustment required after commodity price declines? This paper addresses the question theoretically by developing a simple two-period multi-sector model based on Nakatani (2016) to compare different exchange rate policies, and empirically by estimating elasticities of imports and commodity exports with respect to exchange rates using Papua New Guinean data. In the empirical part, using various econometric methods, I find the statistically significant elasticities of commodity exports to real exchange rates. In the theoretical part, by introducing the notion of a shadow exchange rate premium, I show how the rationing of foreign exchange reduces consumer welfare. Using the estimated elasticities and theoretical outcomes, I further discuss policy implications for resource-rich countries with a focus on Papua New Guinea.

Keywords: Balance of payments adjustment; Exchange rate policy; Foreign exchange; Agricultural exports; Commodities; Papua New Guinea; Commodity Exporters, Elasticities, Foreign Reserve, Invervention, Cointegration, ECM, ARDL, TSLS, Intervention, Open Economy Macroeconomics, Agriculture in International Trade (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-opm
Date: 2017-12-01
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Working Paper: Adjustment to Negative Price Shocks by a Commodity Exporting Economy: Does Exchange Rate Flexibility Resolve a Balance of Payments Crisis? (2018) Downloads
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