The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
How should resource-rich economies handle the balance of payments adjustment required after
commodity price declines? This paper addresses the question theoretically by developing a
simple two-period multi-sector model based on Nakatani (2016) to compare different exchange
rate policies, and empirically by estimating elasticities of imports and commodity exports with
respect to exchange rates using Papua New Guinean data. In the empirical part, using various
econometric methods, I find the statistically significant elasticities of commodity exports to real
exchange rates. In the theoretical part, by introducing the notion of a shadow exchange rate
premium, I show how the rationing of foreign exchange reduces consumer welfare. Using the
estimated elasticities and theoretical outcomes, I further discuss policy implications for resource-rich
countries with a focus on Papua New Guinea.