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

No 2017/267, 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: WP; exchange rate; central bank; foreign currency; Papua New Guinea; Commodity Exporters; Balance of Payments; Agricultural Exports; Elasticities; Foreign Reserve; Intervention; Cointegration; ECM; ARDL; TSLS; export goods; commodity export; import price inflation; policy option; depreciation policy; import price elasticity; shock-induced balance of payments; commodity export data; price inflation; export data; export commodity; import elasticity; Exchange rates; Exchange rate flexibility; Exports; Commodity price shocks; Global; Pacific Islands (search for similar items in EconPapers)
Pages: 36
Date: 2017-12-01
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Citations: View citations in EconPapers (11)

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