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

Abstract

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.

Macroeconomic Shocks and Trade Balance Adjustments in Papua New Guinea

“…In the meantime, it has sparked wide debates as to whether the PNG LNG led resource boom has any spillover to the rest of the economy. During much of this period, the country was bothered by an overvalued currency, balance of payment crisis, a crowding-out non-resource economy, a classical demonstration of the Dutch Disease symptoms (Basu et al, 2013).…”

Sovereign wealth funds and macroeconomic stability in oil‐exporting African countries

“…Basu et al . () simulate the effects of SWFs in Papua New Guinea. The simulation analysis indicates that SWFs reduce macroeconomic volatility and enhance a stable fiscal regime.…”

“…Similar to Basu et al . (), we develop a link between sovereign wealth funds and oil windfall. We assume that the government adopts a fiscal stance where a constant share of the oil windfall is saved in the SWFs.…”

“…The gap that this study seeks to fill is to examine whether the establishment of SWFs can reduce macroeconomic instability in oil‐exporting African countries. While findings have shown that the establishment of SWFs can minimise macroeconomic uncertainty in oil producing countries (see Usui, ; Basu et al ., ), there have been few empirical studies evaluating the effectiveness of SWFs in oil‐exporting African countries. Few studies such as Triki and Faye () only discuss the potential roles the SWFs can play in African economies.…”

Effect of sovereign wealth funds in commodity‐exporting economies when commodity prices affect interest spreads

“…Against this background, we reconsider the role of an SWF in commodity‐exporting economies facing the recent volatile fluctuations of commodity prices using a dynamic stochastic general equilibrium (DSGE) model. Some prior studies analyze small open DSGE models of commodity‐exporting economies with an SWF (e.g., Basu et al, 2013; Berg et al, 2013; Bergholt et al, 2019; Dagher et al, 2012; Melina et al, 2016). Dagher et al (2012) analyze the impact of oil windfalls on low‐income countries and show that an SWF can help achieve macroeconomic stability and improve welfare.…”