Abstract
The productivity slump in the 2000 decade whilst Australia was riding on the biggest mining boom in its history posed a conundrum. The mining boom caused a real exchange rate appreciated due to the skyrocketing terms of trade fuelled by demand for minerals from the mega-Asian economies. The exchange rate appreciation has led to deindustrialisation and Dutch Disease effects making traditional exports internationally uncompetitive. The paper grasps the nettle of designing monetary policies to prevent the resource boom from turning to a resource curse. A New Keynesian Phillips Curve with time-varying NAIRU augmented by tradeoffs between productivity and wage aspirations is empirically validated using State Space methodology and the Kalman Filter to shed light on the policy challenges ahead. It is contended that RBA’s use of Taylor type policy rules to target inflation because of its procyclicality exacerbated deindustrialisation and Dutch Disease effects. Therefore, the feasibility of alternative adjustment policies such as Sovereign Wealth Fund (SWF), Foreign Exchange Market Intervention, Structural Budget Rules and Protectionist Policies that safeguard learning-by-doing effects and dynamic economies of scale and reform of Industrial Relations should be reviewed to combat the emergence of irreversible resource curse effects.
Highlights
The Australian economy in middle of the 2010 decade was riding on the crest of the biggest mining boom in its recorded history blitzing to insignificance all the previous iconic booms such as the gold rush of the 1850s, the Korean wool boom of the 1950s and the energy boom of the 1970s both in its macroeconomic impact and duration
The analysis highlights that procyclicality of the Taylor rule that lies at the core of current monetary policy design by the RBA to achieve target inflation makes the Taylor rule a counterproductive policy reaction function devoid of endogenous credibility leading to the exacerbation of deindustrialisation and Dutch Disease (DD) effects that could turn the resource boom into a resource curse. vi
The coefficient of the unemployment gap in the bivariate model is -1.40 compared to the lower coefficient of -1.36 for the unemployment gap in the univariate model. Both models pass a battery of diagnostic tests and the bivariate model appear to give a better fit than the univariate model according to the log likelihood statistic. These empirical results confirm that the inclusion of information on the changes in “wage aspiration” effects (A) that are caused by productivity and TOT shocks improve the usefulness of the unemployment gap for the designing monetary policy to achieve the inflation targeting goals in a SOE such as Australia
Summary
The productivity slump in the 2000 decade whilst Australia was riding on the biggest mining boom in its history posed a conundrum. The mining boom caused a real exchange rate appreciated due to the skyrocketing terms of trade fuelled by demand for minerals from the mega-Asian economies. The exchange rate appreciation has led to deindustrialisation and Dutch Disease effects making traditional exports internationally uncompetitive. It is contended that RBA’s use of Taylor type policy rules to target inflation because of its procyclicality exacerbated deindustrialisation and Dutch Disease effects. The feasibility of alternative adjustment policies such as Sovereign Wealth Fund (SWF), Foreign Exchange Market Intervention, Structural Budget Rules and Protectionist Policies that safeguard learning-by-doing effects and dynamic economies of scale and reform of Industrial Relations should be reviewed to combat the emergence of irreversible resource curse effects Productivity conundrum, deindustrialization, Dutch disease, Time-Varying NAIRU, New Keynesian Phillips curve, inflation targeting, state space methodology, Taylor rule, Australia
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
