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Resource Boom, Productivity Growth and Real Exchange Rate Dynamics - A dynamic general equilibrium analysis of South Africa

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Abstract

We study the impact of a natural resource boom on structural change and real exchange rate dynamics, taking into account the indirect effect via relative sectoral productivity changes. Our contribution relative to the Dutch disease literature is threefold. First, the productivity specification is extended from simple learning by doing to include trade barriers and technology gap dynamics, consistent with the modern understanding of productivity growth. Second, we offer a dynamic general equilibrium model with imperfect substitution between domestic and foreign goods. Third, the model is applied to South Africa and analyzes the macroeconomic impact of the gold price increase in the 1970s. Political pressure for rapid domestic spending after a surge in resource rents tends to generate myopic government behavior with unsustainable high consumption spending. Such fiscal response to higher resource income is captured by the model specification. Numerical simulations show how the resource boom can help explain the structural change and real exchange rate path observed in South Africa. Due to productivity effects the initial real appreciation is followed by gradual depreciation of the real exchange rate.

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  • Hildegunn Ekroll Stokke, 2006. "Resource Boom, Productivity Growth and Real Exchange Rate Dynamics - A dynamic general equilibrium analysis of South Africa," Working Paper Series 7206, Department of Economics, Norwegian University of Science and Technology.
  • Handle: RePEc:nst:samfok:7206
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    Cited by:

    1. Jeffrey Frankel, 2007. "On The Rand: Determinants Of The South African Exchange Rate," South African Journal of Economics, Economic Society of South Africa, pages 425-441.
    2. Pilar Poncela & Eva Senra & Lya Paola Sierra, 2017. "Long-term links between raw materials prices, real exchange rate and relative de-industrialization in a commodity-dependent economy: empirical evidence of “Dutch disease” in Colombia," Empirical Economics, Springer, pages 777-798.
    3. Melina, Giovanni & Yang, Shu-Chun S. & Zanna, Luis-Felipe, 2016. "Debt sustainability, public investment, and natural resources in developing countries: The DIGNAR model," Economic Modelling, Elsevier, pages 630-649.
    4. van der Ploeg, Frederick, 2006. "Challenges and Opportunities for Resource Rich Economies," CEPR Discussion Papers 5688, C.E.P.R. Discussion Papers.
    5. Hove, Seedwell & Touna Mama, Albert & Tchana Tchana, Fulbert, 2015. "Monetary policy and commodity terms of trade shocks in emerging market economies," Economic Modelling, Elsevier, vol. 49(C), pages 53-71.
    6. Mahagaonkar, Prashanth & Schweickert, Rainer & Chavali, Aditya S., 2009. "Sectoral R&D intensity and exchange rate volatility: a panel study for OECD countries," Kiel Working Papers 1531, Kiel Institute for the World Economy (IfW).
    7. Sean J. Gossel, 2012. "The nominal rand/dollar exchange rate: before and after 1995," Studies in Economics and Finance, Emerald Group Publishing, vol. 29(2), pages 105-117, June.
    8. Frederick van der Ploeg, 2011. "Natural Resources: Curse or Blessing?," Journal of Economic Literature, American Economic Association, pages 366-420.
    9. Frederick van der Ploeg, 2011. "Natural Resources: Curse or Blessing?," Journal of Economic Literature, American Economic Association, pages 366-420.
    10. Ahlerup, Pelle & Baskaran, Thushyanthan & Bigsten, Arne, 2016. "Gold mining and education: a long-run resource curse in Africa?," Working Papers in Economics 666, University of Gothenburg, Department of Economics, revised Mar 2017.

    More about this item

    Keywords

    gold price boom; Dutch disease; trade barriers; fiscal response; deindustrialization;

    JEL classification:

    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa
    • Q33 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Resource Booms (Dutch Disease)

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