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The Macroeconomic Management of Increased Aid: Policy Lessons from Recent Experience

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Author Info
Mumtaz Hussain
Andrew Berg
Shekhar Aiyar

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Abstract

The authors investigate the macroeconomic challenges created by a surge in aid inflows. They develop an analytical framework for examining possible policy responses to increased aid, in terms of absorption and spending of aid-where the central bank controls absorption, through monetary policy and the sale of foreign exchange, and where the fiscal authority controls spending. Different combinations of absorption and spending lead to different macroeconomic consequences. Evidence from five countries that recently experienced an aid surge (Ethiopia, Ghana, Tanzania, Mozambique, and Uganda) shows no support for aid-related real exchange rate appreciation in these countries, but it does indicate that the fear of Dutch disease played an important part in the policy reaction to aid surges. Fiscal and monetary authorities should coordinate their responses to an aid surge, because an uncoordinated response-typically when the fiscal authority wants to spend aid while the central bank wants to avoid exchange rate appreciation-can have serious negative macroeconomic consequences. Copyright 2009 The Authors. Journal compilation 2009 Blackwell Publishing Ltd.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-9361.2009.00503.x
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Publisher Info
Article provided by Blackwell Publishing in its journal Review of Development Economics.

Volume (Year): 13 (2009)
Issue (Month): s1 (08)
Pages: 491-509
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Handle: RePEc:bla:rdevec:v:13:y:2009:i:s1:p:491-509

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=1363-6669

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  1. Shekhar Aiyar & Shaun K. Roache & Mumtaz Hussain & Tokhir N. Mirzoev & Amber Mahone & Andrew Berg, 2007. "The Macroeconomics of Scaling Up Aid: Lessons from Recent Experience," IMF Occasional Papers 253, International Monetary Fund.
  2. McGillivray, Mark & Morrissey, Oliver, 2001. "Fiscal Effects of Aid," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  3. Philip R. Lane & Gian Maria Milesi-Ferretti, 2004. "The Transfer Problem Revisited: Net Foreign Assets and Real Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 841-857, 02. [Downloadable!] (restricted)
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  4. Raghuram Rajan & Arvind Subramanian, 2005. "What Undermines Aid's Impact on Growth?," IMF Working Papers 05/126, International Monetary Fund. [Downloadable!]
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  5. Cristina Arellano & Aleš Bulir & Timothy D. Lane & Leslie Lipschitz, 2005. "The Dynamic Implications of Foreign Aid and Its Variability," IMF Working Papers 05/119, International Monetary Fund. [Downloadable!]
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  6. repec:pal:imfstp:v:50:y:2003:i:1:p:4 is not listed on IDEAS
  7. Edward F. Buffie & Christopher Adam & Catherine A. Pattillo & Stephen A. O'Connell, 2007. "Monetary Policy Rules for Managing Aid Surges in Africa," IMF Working Papers 07/180, International Monetary Fund. [Downloadable!]
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