No. 8/2006
RESOURCE BOOM, PRODUCTIVITY GROWTH
AND REAL EXCHANGE RATE DYNAMICS
- A dynamic general equilibrium analysis of South Africa
Hildegunn Ekroll Stokke
Abstract:
We study the impact of a natural resource boom on structural change
and real exchange rate dynamics, taking into account the indirect effect
via relative sectoral productivity changes. Our contribution relative
to the Dutch disease literature is threefold. First, the productivity
specification is extended from simple learning by doing to include trade
barriers and technology gap dynamics, consistent with the modern understanding
of productivity growth. Second, we offer a dynamic general equilibrium
model with imperfect substitution between domestic and foreign goods.
Third, the model is applied to South Africa and analyzes the macroeconomic
impact of the gold price increase in the 1970s. Political pressure for
rapid domestic spending after a surge in resource rents tends to generate
myopic government behavior with unsustainable high consumption spending.
Such fiscal response to higher resource income is captured by the model
specification. Numerical simulations show how the resource boom can help
explain the structural change and real exchange rate path observed in
South Africa. Due to productivity effects the initial real appreciation
is followed by gradual depreciation of the real exchange rate.
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