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

Author/Editor: Suman S Basu | Jan Gottschalk | Werner Schule | Nikhil Vellodi | Shu-Chun S. Yang
Authorized for Distribution: May 31, 2013
Electronic Access: Free Full Text (PDF file size is 970KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

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.
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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
    Published:   May 31, 2013        
    ISBN/ISSN:   9781484321379/1018-5941   Format:   Paper
    Stock No:   WPIEA2013138   Pages:   37
    Price:   US$18.00
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