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Reserves of Natural Resources in a Small Open Economy

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  • Isaac Gross

    (Reserve Bank of Australia)

  • James Hansen

    (Reserve Bank of Australia)

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    Abstract

    This paper studies the effect of a shock to resource prices in a small open economy where the stock of natural resources is responsive to exploration activity, and where extraction reduces the future availability of reserves. We show that the effects of a resource price shock on resource investment, labour utilisation and extraction are all amplified in the presence of endogenous reserves. We also find that spillovers to broader economic activity, including changes in domestic production, non-resource exports and consumption, are all greater in the presence of exploration activity. However, we find that incorporating endogenous reserves does not fundamentally change the effects of a resource price shock on key price measures including consumer prices, the real exchange rate and domestic interest rates.

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    Bibliographic Info

    Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2013-14.

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    Date of creation: Dec 2013
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    Handle: RePEc:rba:rbardp:rdp2013-14

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    Keywords: natural resources; small open economy;

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    16. Ruy Lama & Juan Pablo Medina, 2012. "Is Exchange Rate Stabilization an Appropriate Cure for the Dutch Disease?," International Journal of Central Banking, International Journal of Central Banking, vol. 8(1), pages 5-46, March.
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