Riding the Boom: How should monetary and fiscal policy manage natural resource wealth?

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Natural resource discoveries are usually accompanied by optimism and excitement. After the 2007 discovery of offshore oil, Ghana's President John Kufour said "with oil as a shot in the arm, we're going to fly". However, this excitement is not always well placed. The existence of a "resource curse" is now well established in academic literature, describing the systematically lower growth of countries with natural resources than those without. This curse has already been witnessed in countries around the world, from Nigeria to Venezuela. It will also become increasingly important as the industrialisation of the developing world boost demand for commodities, and new deposits are discovered in countries without the institutional structure to cope with them. This project will consider how fiscal and monetary policy can address the resource curse, and improve the quality of life and economic prospects in resource rich countries around the world. Countries that have recently discovered natural resources would do well to heed the experiences of the tiny island nation of Nauru. During the 1980s it was the richest nation in the world by GDP per capita. Now that the boom is over the country has been consigned to a future of dependence on regional neighbours by the dual ravages of economic mismanagement and environmental degradation. As a child growing up in Nauru I quickly learned of how the barren interior of the island had been shaped by phosphate mining. My early experiences in Nauru planted the seeds of my inquiry into the resource curse. A desire for other countries not to repeat the same mistakes has nurtured my focus.This project will investigate what governments and central banks can do to avoid the resource curse. Existing academic work has focused on the long run question of whether resource wealth should be spent or saved, and has successfully shaped policy around the world. This project focuses on the short run question of how to manage an economy's adjustment to a resource discovery. It will be based around four papers: two on monetary policy and two on fiscal policy. Paper 1 asks if an actively managed currency can be an additional monetary tool when parts of an economy respond differently to a resource windfall. Paper 2 considers whether active monetary policy may be possible in developing countries without credit markets, by actively manipulating the currency. Paper 3 investigates how sovereign wealth funds should be coordinated with existing foreign currency reserves. Paper 4 asks whether resource revenues would be better used for cutting distortionary taxes, rather than investing domestically or saving abroad.The project will use rigorous techniques at the forefront of macroeocnomic modelling, called "dynamic stochastic general equilibrium" (DSGE) models. These techniques allow us to address previously unanswered questions linking the behaviour of people and firms at a small scale to broad macroeconomic aggregates. This project will make a theoretical contribution by relaxing some commonly used but empirically unsupported assumptions on capital markets and taxation. In this way it may serve as a basis for future work by other researchers.This research will be conducted at the University of Oxford. It will benefit from its position at the forefront of research into natural resource management at the Oxford Centre for the Analysis of Resource Rich Economies (OxCarre). It will also benefit from the mentorship of Professor Simon Wren-Lewis, who has extensive experience in policy-focused research employing the latest DSGE techniques.Finally, this project will engage actively with researchers and policymakers around the world. To ensure academic insight this project will involve training at summer schools and visits to leading academics in the field. To ensure policy relevance the project will engage directly with fiscal and policymakers in both developed and developing countries.