Mining booms and the exchange rate

The balance of payments identity linking the current account to net domestic investment and foreign capital inflows is used as a framework to assess the effects of a mining boom on the exchange rate. The exchange rate response is found to vary with whether the boom is generated by an increase in global demand or an increase in domestic supply, and the response varies over time as the boom moves through investment and production stages. Also, the exchange rate response depends on the mix of resident and nonresident investment funds, the share of the investment domestically sourced and the distribution of windfall income and its expenditure. A key result is the absence of a simple relationship between the terms of trade and the exchange rate.