Document Type

Journal Article


Increased global demand for energy and other resources, particularly from the rapidly developing economiesof China and India and the opening up of global resource markets to global investors and speculative activity,has resulted in considerable recent turbulence in resource prices. The recent magnitude of change inresource prices, both positive and negative, and their macroeconomic implications is of considerablecontemporary importance to both resource importing and exporting economies. For a resource exportingeconomy, such as that of Australia, the recent resource price boom has resulted in: increased governmenttaxation revenue, increased employment and wages in the resource and resource related sectors, increasedspending in the domestic economy that contributed to buoyant economic growth, increased resourceexports to the booming economies of China and India and contributed to a stronger domestic currency withbeneficial effects upon inflation. On the other hand these developments have had adverse effects on the nonresourcesector by: subjecting it to more intense competition for limited resources, contributing to a loss ofinternational competitiveness and reduced exports arising from a stronger exchange rate, reducingemployment in the relatively more labour intensive non-resource sector, and contributing to an eventualslow down in the overall economy. These positive and negative effects, and the overall impact of a resourceprice boom, require a fundamentally closer analysis of the structure of the economy under scrutiny. In thiscontext the policy response by government is likely to be pivotal in determining the overall macroeconomicoutcomes from a resource price boom.The aim of this paper is to develop a generic analytical framework to appraise economic outcomes in thewake of a resource price boom for a resource producing and exporting economy. To this end a dynamic longrun macroeconomic model is developed, emphasising the important role and contribution of governmentfiscal policy in influencing subsequent macroeconomic outcomes. The adjustment process in the modelarising from a resource price shock emphasises a spending (or wealth) effect, an income effect, a revenueeffect, a current account effect and an exchange rate effect, which facilitate a robust analysis of subsequentmacroeconomic outcomes from such a shock as well as related policy responses.