In this seminar, a five-dimensional Bayesian Vector Autoregressive (BVAR) model is used to investigate how the trade balance of Papua New Guinea (PNG), a resource-rich developing country, reacts to different macroeconomic shocks during the period of 2002 – 2016.

Utilizing a standard Cholesky identification, we disentangle shocks generating from mining and non-mining activity. The evidence reveals that non-mining activity shock turns out to be a significant factor in driving the historical fluctuations in imports only while mining activity shock remains resilient in explaining the historical changes in both exports and imports.

The results further show that the overall trade balance will be improved in response to a positive mining activity shock and a sudden devaluation of real Kina exchange rate, while the effect of a non-mining shock is ambiguous.