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Fiscal inertia, donor credibility, and the monetary management of aid surges

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Author Info

  • Buffie, Edward F.
  • O'Connell, Stephen A.
  • Adam, Christopher

Abstract

Donors cannot pre-commit to support scaled-up public spending programs on a continuing basis, nor can governments credibly commit to curtail expenditure rapidly in the event that aid revenues contract. An aid boom may therefore be accompanied by a credibility problem. When this is the case, the absorb-and-spend strategy recommended by the IMF leads to capital flight, higher inflation, and large current account surpluses inclusive of aid. The right policy package combines a critical minimum degree of fiscal restraint with reverse sterilization.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 93 (2010)
Issue (Month): 2 (November)
Pages: 287-298

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Handle: RePEc:eee:deveco:v:93:y:2010:i:2:p:287-298

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Web page: http://www.elsevier.com/locate/devec

Related research

Keywords: Aid Credibility Currency substitution Pooling Capital flows;

References

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  1. Edward Buffie & Christopher Adam & Stephen O'Connell & Catherine Patillo, 2006. "Riding the Wave: Monetary Responses to Aid Surges in Low-Income Countries," CSAE Working Paper Series 2006-04, Centre for the Study of African Economies, University of Oxford.
  2. Christopher Adam & David Bevan, 2004. "Aid, Public Expenditure and Dutch Disease," Development and Comp Systems 0409027, EconWPA.
  3. Robert Lensink & Oliver Morrissey, 2000. "Aid instability as a measure of uncertainty and the positive impact of aid on growth," Journal of Development Studies, Taylor & Francis Journals, vol. 36(3), pages 31-49.
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  6. Jean-Claude Nachega, 2001. "Financial Liberalization, Money Demand, and Inflation in Uganda," IMF Working Papers 01/118, International Monetary Fund.
  7. Oya Celasun & Jan Walliser, 2008. "Predictability of aid: Do fickle donors undermine aid effectiveness?," Economic Policy, CEPR & CES & MSH, vol. 23, pages 545-594, 07.
  8. Eifert, Benn & Gelb, Alan, 2005. "Improving the dynamics of aid : towards more predictable budget support," Policy Research Working Paper Series 3732, The World Bank.
  9. Asea, Patrick K & Reinhart, Carmen M, 1996. "Le Prix de l'Argent: How (Not) to Deal with Capital Inflows," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 5(3), pages 231-71, October.
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  12. Adam, Christopher, 1999. "Financial Liberalisation and Currency Demand in Zambia," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 8(3), pages 268-306, October.
  13. Peter S. Heller, 2005. "Pity the Finance Minister: Issues in Managing a Substantial Scaling-Up of Aid Flows," IMF Working Papers 05/180, International Monetary Fund.
  14. Timothy D. Lane & Ales Bulir, 2002. "Aid and Fiscal Management," IMF Working Papers 02/112, International Monetary Fund.
  15. Adam Bennett & Eduardo Borensztein & Tomás J. T. Baliño, 1999. "Monetary Policy in Dollarized Economies," IMF Occasional Papers 171, International Monetary Fund.
  16. Philip R. Lane & Aaron Tornell, 1999. "The Voracity Effect," American Economic Review, American Economic Association, vol. 89(1), pages 22-46, March.
  17. Miguel A. Savastano, 1996. "Dollarization in Latin America - Recent Evidence and Some Policy Issues," IMF Working Papers 96/4, International Monetary Fund.
  18. Blundell, Richard & Pashardes, Panos & Weber, Guglielmo, 1993. "What Do We Learn About Consumer Demand Patterns from Micro Data?," American Economic Review, American Economic Association, vol. 83(3), pages 570-97, June.
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Citations

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Cited by:
  1. Buffie, Edward & Adam, Christopher & O'Connell, Stephen & Pattillo, Catherine, 2008. "Riding the wave: Monetary responses to aid surges in low-income countries," European Economic Review, Elsevier, vol. 52(8), pages 1378-1395, November.
  2. Gaoussou Diarra, 2011. "Aid unpredictability and absorptive capacity: analyzing disbursement delays in Africa," Economics Bulletin, AccessEcon, vol. 31(1), pages 1004-1017.
  3. Oscar Becerra & Eduardo Cavallo & Ilan Noy, 2010. "In the Aftermath of Large Natural Disasters, what happens to foreign aid?," Working Papers 201018, University of Hawaii at Manoa, Department of Economics.
  4. Christopher Adam & Stephen O’Connell & Edward Buffie, 2007. "Monetary Policy Rules For Manging Aid Surges In Africa," WEF Working Papers 0016, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.

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