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

Suman Basu, Jan Gottschalk, Werner Schule, Nikhil Vellodi and Susan Yang

No 2013/138, IMF Working Papers from International Monetary Fund

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: WP; monetary policy; natural resource; Papua New Guinea; resource-rich developing countries; DSGE models; revenue inflow; spending profile; monetary policy option; reserve management policy; transmission mechanism; resource revenue; oil price shock; natural resource revenue; monetary policy sector; monetary policy challenge; monetary policy stance; spending choice; Natural resources; Consumption; Public investment spending; Africa (search for similar items in EconPapers)
Pages: 37
Date: 2013-05-31
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Citations: View citations in EconPapers (2)

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