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

 
Author/Editor: Basu, Suman ; Gottschalk, Jan ; Schule, Werner ; Vellodi, Nikhil ; Yang, Shu-Chun
 
Publication Date: May 31, 2013
 
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Summary: 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.
 
Series: Working Paper No. 13/138
Subject(s): Natural resources | Papua New Guinea | Fiscal policy | Current account deficits | Government expenditures | Monetary policy | Reserves accumulation | Economic models

 
English
Publication Date: May 31, 2013
ISBN/ISSN: 9781484321379/2227-8885 Format: Paper
Stock No: WPIEA2013138 Pages: 37
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