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Resource Dependence, Commodity Shocks and the Role of the Exchange Rate: An Empirical Study of Papua New Guinea

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  • Rubayat Chowdhury

Abstract

The role of the exchange rate as a ‘shock absorber’ is often undermined in resource-dependent developing countries when a negative commodity price shock hits the economy. Rather than pursuing greater flexibility, the policymakers rely more on intervention strategies which further aggravates the balance of payment crisis by leading to a forex crisis. This paper presents an empirical study of Papua New Guinea which has been facing a severe shortage of foreign currency since 2013. It examines if a sudden depreciation shock to the exchange rate stimulates the overall trade balance while simultaneously evaluating its impact on inflation. Employing a structural vector autoregression model I find that the positive trade balance effect outweighs the negative inflationary effect. Further, I find external shocks as the major sources of real business cycles and a negative response of the non-resource economy to a positive resource shock.

Suggested Citation

  • Rubayat Chowdhury, 2022. "Resource Dependence, Commodity Shocks and the Role of the Exchange Rate: An Empirical Study of Papua New Guinea," CAMA Working Papers 2022-50, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2022-50
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2022-08/50_chowdhury_2022.pdf
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    More about this item

    Keywords

    SVAR; natural resource; commodity shocks; forex market; exchange rate; devaluation; Papua New Guinea;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts

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