Neil Dias Karunaratne, School of Economics Discussion Paper No. 504 October 2013, School of Economics, The University of Queensland.

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The productivity slump in the 2000 decade whilst Australia was riding on the biggest mining boom in its history posed a conundrum. The mining boom caused a real exchange rate appreciated due to the skyrocketing terms of trade fuelled by demand for minerals from the mega-Asian economies. The exchange rate appreciation has led to deindustrialisation and Dutch Disease effects making traditional exports internationally uncompetitive. The paper grasps the nettle of designing monetary policies to prevent the resource boom from turning to a resource curse. A New Keynesian Phillips Curve with time-varying NAIRU augmented by tradeoffs between productivity and wage aspirations is empirically validated using State Space methodology and the Kalman Filter to shed light on the policy challenges ahead. It is contended that RBA’s use of Taylor type policy rules to target inflation because of its procyclicality exacerbated deindustrialisation and Dutch Disease effects. Therefore, the feasibility of alternative adjustment policies such as Sovereign Wealth Fund (SWF), Foreign Exchange Market Intervention, Structural Budget Rules and Protectionist Policies that safeguard learning-by-doing effects and dynamic economies of scale and reform of Industrial Relations should be reviewed to combat the emergence of irreversible resource curse effects.