External Adjustment in a Resource-Rich Economy : The Case of Papua New Guinea

How should resource-rich economies handle the balance of payments adjustment required aftercommodity price declines? This paper addresses the question theoretically by developing asimple two-period multi-sector model based on Nakatani (2016) to compare different exchangerate policies, and empirically by estimating elasticities of imports and commodity exports withrespect to exchange rates using Papua New Guinean data. In the empirical part, using variouseconometric methods, I find the statistically significant elasticities of commodity exports to realexchange rates. In the theoretical part, by introducing the notion of a shadow exchange ratepremium, I show how the rationing of foreign exchange reduces consumer welfare. Using theestimated elasticities and theoretical outcomes, I further discuss policy implications for resource-richcountries with a focus on Papua New Guinea