What is it about?
Does exchange rate flexibility resolve a balance of payments crisis in a resource-rich economy? This paper develops an original theoretical model in which negative commodity price shocks cause the balance of payments crisis. Estimating elasticities of various commodity exports with respect to the exchange rates, a counter-factual simulation analysis is conducted to evaluate the effects of exchange rate flexibility on foreign reserves.
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Why is it important?
This paper invents the fourth generation model of currency crisis. This is the first empirical research that estimated exchange rate elasticity of metal, agriculture, fishery, and forestry exports, using Papua New Guinean data. Our results show that the Marshall-Lerner condition is satisfied for the resource-rich economy. Therefore, a flexible exchange rate policy is useful for the resource-rich economy as commodity exports respond to exchange rates.
Perspectives
This is a journal article version of my IMF working paper originally published as “External Adjustment in a Resource-Rich Economy: The Case of Papua New Guinea.” This analysis resolved a long-lasting debate about flexible exchange rate policy versus fixed exchange rate policy for commodity exporting countries.
Dr. Ryota Nakatani
International Monetary Fund
Read the Original
This page is a summary of: Adjustment to negative price shocks by a commodity exporting economy: Does exchange rate flexibility resolve a balance of payments crisis?, Journal of Asian Economics, August 2018, Elsevier,
DOI: 10.1016/j.asieco.2018.06.002.
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