This thesis explores three essays in macroeconomics with an application to Botswana. The first chapter studies the transmission path of the impact and response to a negative shock to commodity prices on resource-rich developing economies using a medium-scale dynamic stochastic general equilibrium (DSGE) model. The model incorporates a detailed fiscal block and is calibrated for Botswana. The results show that a negative shock on diamond prices has a negative impact on mining GDP, government revenues, and total GDP. The
main channel of propagation is the fiscal effect, a fall in government spending due to the fall in resource revenues. The analysis demonstrate that without macroeconomic policy intervention, the impact of the shock is deep and prolonged. In contrast, a macroeconomic policy response that includes a modest decrease in government spending, an increase in public debt and an increase in tax rates alongside an expansionary monetary policy mitigates the impact of the shock on the economy.

The second chapter presents a large monthly macroeconomic dataset for Botswana to be used for empirical macroeconomic analysis and forecasting that require “big data”. The dataset consists of 96 economic indicators that represent a broad coverage of the economy in line with earlier compilations of datasets of this type. The variance explained by static factors and dynamic factors demonstrate that the dataset allows for a factor representation. A forecasting demonstration suggests that dynamic factor models using the large macroeconomic dataset have a higher predictive ability for trimmed-mean core
inflation, headline inflation and credit growth compared to a benchmark autoregressive model. This dataset will therefore be useful for macroeconomic policy and research in Botswana. Notably, the dynamic factor models could also be included in the central bank’s forecasting toolkit.

Lastly, chapter three analyses the macroeconomic effects of external shocks transmitted through commodity prices using a generalised dynamic factor model based on a large quarterly macroeconomic dataset for Botswana. The study uses sign restrictions to identify three external shocks that drive the dynamics of the domestic economy. The analysis show that commodity price changes due to a global demand shock have a statistically and economically significant impact on several key macroeconomic variables: output expands, inflation rise and the trade balance improves. Commodity-specific price shocks have a moderate effect on the economy, with domestic inflation more responsive to an oil price
shock while output is more sensitive to a diamond price shock in the short run. Overall, the global demand shock explain a greater share of the commodity price movements and the variation of other domestic macroeconomic variables.