New OxCARRE Research: Boom Goes The Price: Giant resource discoveries and real exchange rate appreciation

Gerhard Toews ([sites.google.com] OxCARRE, University of Oxford) and OxCARRE alumni Torfinn Harding ([sites.google.com] NHH Norwegian School of Economics) and Radek Stefanski ([weebly.com] University of St Andrews) write on

Boom Goes The Price: Giant resource discoveries and real exchange rate appreciation

Abstract:

We estimate the effect of giant oil and gas discoveries on bilateral real exchange rates. The size and plausibly exogenous timing of such discoveries make them ideal for identifying the effects of an anticipated resource boom on prices. We find that a giant discovery with the value of a country’s GDP increases the real exchange rate by 14% within 10 years following the discovery. The appreciation is nearly exclusively driven by an appreciation of the prices of non-tradable goods. We show that these empirical results are qualitatively and quantitatively in line with a calibrated model with forward looking behaviour and Dutch disease dynamics.

Full paper available here. [oxcarre.ox.ac.uk]