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Resource Price Turbulence and Macroeconomic Adjustment for a Resource Exporter: a conceptual framework for policy analysis

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    Abstract

    Increased global demand for energy and other resources, particularly from the rapidly developing economies of China and India and the opening up of global resource markets to global investors and speculative activity, has resulted in considerable recent turbulence in resource prices. The recent magnitude of change in resource prices, both positive and negative, and their macroeconomic implications is of considerable contemporary importance to both resource importing and exporting economies. For a resource exporting economy, such as that of Australia, the recent resource price boom has resulted in: increased government taxation revenue, increased employment and wages in the resource and resource related sectors, increased spending in the domestic economy that contributed to buoyant economic growth, increased resource exports to the booming economies of China and India and contributed to a stronger domestic currency with beneficial effects upon inflation. On the other hand these developments have had adverse effects on the non resource sector by: subjecting it to more intense competition for limited resources, contributing to a loss of international competitiveness and reduced exports arising from a stronger exchange rate, reducing employment in the relatively more labour intensive non resource sector, and contributing to an eventual slow down in the overall economy. These positive and negative effects, and the overall impact of a resource price boom, require a fundamentally closer analysis of the structure of the economy under scrutiny. In this context the policy response by government is likely to be pivotal in determining the overall macroeconomic outcomes from a resource price boom. The aim of this paper is to develop a generic analytical framework to appraise economic outcomes in the wake of a resource price boom for a resource producing and exporting economy. To this end a dynamic long run macroeconomic model is developed, emphasising the important role and contribution of government fiscal policy in influencing subsequent macroeconomic outcomes. The adjustment process in the model arising from a resource price shock emphasises a spending (or wealth) effect, an income effect, a revenue effect, a current account effect and an exchange rate effect, which facilitate a robust analysis of subsequent macroeconomic outcomes from such a shock as well as related policy responses.

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    Bibliographic Info

    Paper provided by School of Economics, University of Wollongong, NSW, Australia in its series Economics Working Papers with number wp09-06.

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    Length: 31 pages
    Date of creation: 2009
    Date of revision:
    Handle: RePEc:uow:depec1:wp09-06

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    Postal: School of Economics, University of Wollongong, Northfields Avenue, Wollongong NSW 2522 Australia
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    Keywords: Resource price shock; dynamic macroeconomic model; simulation analysis; macroeconomic adjustment; policy analysis;

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    10. Buiter, William H & Purvis, Douglas D, 1980. "Oil, Disinflation, and Export Competitiveness : A Model of the "Dutch Disease"," The Warwick Economics Research Paper Series (TWERPS) 185, University of Warwick, Department of Economics.
    11. Jeffrey A. Frankel, 1993. "On Exchange Rates," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061546, December.
    12. Harvie, Charles & Thaha, Atifah, 1994. "Oil production and macroeconomic adjustment in the Indonesian economy," Energy Economics, Elsevier, vol. 16(4), pages 253-270, October.
    13. Blanchard, Olivier J, 1981. "Output, the Stock Market, and Interest Rates," American Economic Review, American Economic Association, vol. 71(1), pages 132-43, March.
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