4Determinants of Real Exchange Rate in Papua New Guinea

4.1 Introduction

As discussed in Chapter 2, the real exchange rate - the price ratio of tradable to nontradable goods - is the key link between resources booms and their impact on the performance of an economy. Like other relative prices, real exchange rates are affected by real and nominal disturbances, which may be either long lasting or transient. A real exchange rate reacts to a series of real and nominal disturbances, including international terms of trade (TOT) shocks, government expenditure patterns, trade restrictions, net capital inflow and technological progress, as well as to domestic credit creation and nominal devaluation.

The objective of this chapter is twofold: to construct ...

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