Abstract

Australia is currently on the cusp of the biggest mining boom in its history powered by demand from the fast growing mega Asian economies. However, productivity has slumped in 2000 decade compared to the previous despite a record increase in the terms-of-trade and capital investment in the mining sector. The appreciation of the real exchange rate due to spending effects of the booming mining sector and deindustrialisation of the lagging manufacturing sector by undermining the international competitiveness of manufactured exports has infected the Australian economy with Dutch Disease effects. Policy designers face the daunting task of designing appropriate adjustment policies that should groom manufacturing industries with productivity generation learning-by-doing economies, whilst at the same time implementing monetary policies that would keep inflation within the target zone. The paper sheds light on the issues relating to the designing g monetary policy in the context of productivity augmenting time-varying NAIRU using a New Keynesian Phillips curve framework. State space methodology and Kalman Filer has been used to empirically validate the model. Various policy options besides a Taylor rule for keeping inflation within the target zone and policy options to prevent the resource boom from turning to a resource curse are also commented on.