Abstract
This paper investigates the role of “absorptive capacity” to manage unexpected shocks to their real economy, with a focus on small, open, natural resource-dependent economies. A quarterly panel data series for 45 countries is constructed, including 23 developing Asian countries for empirical investigation. For the entire sample, the analysis finds that absorptive capacity, choice of exchange rate regime, presence of wealth funds, level of foreign reserves, or degree of resource dependency alone, does not matter when real shocks are introduced to output. However, levels of absorptive capacity or ability to use resource windfalls effectively, and foreign reserves begin to matter when the sample is restricted to resource-dependent countries. Case studies from Papua New Guinea and Timor-Leste support this claim highlighting the challenges they face with a sudden influx of natural resource revenues when capacity to effectively use fiscal revenues is limited.
Highlights
AND LITERATURE REVIEWManagement of natural resource windfalls is pivotal to the short- to medium-run challenge for policy makers in resource-rich countries
In order to examine the empirical behavior of real gross domestic product (GDP) and real effective exchange rates when commodity terms of trade and real interest rate shocks are introduced, we use panel vector autoregressive (VAR) analysis
The results of the analyses suggest, broadly, that commodity price shocks per se do not have a significant impact on real output, regardless of whether a country is natural resource dependent or not
Summary
AND LITERATURE REVIEWManagement of natural resource windfalls is pivotal to the short- to medium-run challenge for policy makers in resource-rich countries. This paper relates to Broda (2004) in investigating impacts of terms of trade (TOT) shocks on real factors, but differs in several aspects. It investigates the transmission of the shocks through commodity prices rather than export and import price movements, in general. This is because the commodity prices tend to be much more volatile than prices of manufacturing products, and commodities are significant for many small, open economies. Attention is paid to various factors that affect the degree of impacts arising from commodity price fluctuations
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