title: Essays on commodity prices, commodity abundance and the macroeconomy
Creators: name: Majumder, MK
Publisher: name: University of Tasmania
Year: 2020

description: This dissertation consists of three independent but related studies based on the relationship between commodity prices, commodity abundance and the macroeconomy. Commodity prices play an important role in economic growth and prosperity, especially in commodity abundance countries. However, these countries are frequently exposed to commodity price volatility, which causes a high degree of uncertainty in the economy, reducing investment and economic growth. This affects government fiscal balance and consequently external debt. To consider this, the dissertation consists of three essays. The first essay examines the impact of commodity price volatility on fiscal balance, the second essay explores the relationship between commodity price volatility and external debt, and the third essay investigates the role of trade openness on the oil curse. The main objective of the first essay is to explore the impact of commodity price volatility on the government’s fiscal balance. Using a dynamic panel data model for 108 countries from 1993 to 2018, this study finds that governments’ fiscal balances decrease with commodity price volatility. A one standard deviation increase in commodity price volatility leads to a decrease of approximately 0.04 units in the fiscal balance as a percentage of gross domestic product (GDP). In addition, we examine the role of real interest rates in influencing the relationship between commodity price volatility and fiscal balance. The empirical results suggest that the negative impact of commodity price volatility on fiscal balance increases with higher real interest rates. The implication of this result is that, under the sticky-price assumption, an accommodative monetary policy could be effective in moderating the negative effect of commodity price volatility on fiscal balance. The second essay investigates the relationship between commodity price volatility and external debt accumulation for 97 countries from 1993 to 2016. Using a dynamic panel data model, this study finds that external debt accumulation increases with commodity price volatility. A one standard deviation increase in commodity price volatility contributes to a 0.17-units increase in external debt as a share of gross national income (GNI). Further, this study explores the impact of commodity price volatility on external debt under alternative exchange rate regimes. We find evidence suggesting that the effect is significantly higher for countries with a fixed exchange rate regime. In the third essay, we re-examine the paradox that countries with abundant natural resources are poor in terms of real GDP per capita. This paradox, known as the ‘resource curse’, contradicts conventional intuition that natural resources improve economic growth and prosperity. Using dynamic panel data for 95 countries, this study revisits the ‘resource curse’ paradox in terms of oil resource abundance for the period 1980–2017. In addition, we study the role of trade openness in influencing the relationship between oil abundance and economic growth. The study finds that trade openness is a possible avenue to reduce the ‘resource curse’ problem because it allows countries to obtain competitive prices for their resources in the international market and to access advanced technologies to extract those resources more efficiently. Therefore, natural resource-rich economies can reduce the ‘resource curse’ by engaging in international trade.