Shock exposure-commodity prices and the kina

Abstract

Since the kina was floated in 1994, its US dollar value has undergone substantial fluctuations. This paper estimates a model of the determinants of the kina/US dollar exchange rate using quarterly data from 1995 to 2005. The value of the kina is found to be highly dependent on the international price of Papua New Guinea's commodity exports. A 10 per cent increase in commodity prices is estimated to cause the kina to appreciate by 4 per cent immediately and by a further 6 per cent in two quarters' time. No other variable has a robust effect on the value of the kina. These results support the view that Papua New Guinea is highly vulnerable to external commodity price shocks.