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Riding the Wave: Monetary Responses to Aid Surges in Low-Income Countries

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  • Edward Buffie
  • Christopher Adam
  • Stephen O'Connell
  • Catherine Patillo

Abstract

We focus on the management of highly persistent shocks to aid flows, including HIPC or MDG-related increases in net flows, in the presence of currency substitution by the domestic private sector. Such shocks have beneficent long-run effects, but when currency substitution is high they can produce dramatic macroeconomic management problems in the short run. What is the appropriate mix of money and exchange rate targeting in such cases, and the role of temporary sterilization? We analyze these and related issues in an intertemporal optimizing model that allows a portion of aid to be devoted to reducing the government’s seigniorage requirement. Our results argue that a managed float, with little or no sterilization of increases in the monetary base, is the most attractive approach.

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Bibliographic Info

Paper provided by Centre for the Study of African Economies, University of Oxford in its series CSAE Working Paper Series with number 2006-04.

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Date of creation: 2006
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Handle: RePEc:csa:wpaper:2006-04

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Keywords: Aid; Sterilization; Currency Substitution; Seigniorage; Africa;

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References

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Citations

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Cited by:
  1. Edward F. Buffie & Stephen A. O'Connell & Catherine A. Pattillo & Christopher Adam, 2007. "Monetary Policy Rules for Managing Aid Surges in Africa," IMF Working Papers 07/180, International Monetary Fund.
  2. Rafael Portillo & Andrew Berg & Jan Gottschalk & Luis-Felipe Zanna, 2010. "The Macroeconomics of Medium-Term Aid Scaling-Up Scenarios," IMF Working Papers 10/160, International Monetary Fund.
  3. Michael Plante, 2013. "The long–run macroeconomic impacts of fuel subsidies," Working Papers 1303, Federal Reserve Bank of Dallas.
  4. Pedro M. G. Martins, 2010. "Do Capital Inflows Hinder Competitiveness? The Real Exchange Rate in Ethiopia," Working Paper Series 1110, Department of Economics, University of Sussex.
  5. Hisali, Eria, 2010. "Fiscal policy consistency and implications for macroeconomic aggregates: the case of Uganda," Research Reports 102489, Economic Policy Research Centre (EPRC).
  6. Michael Plante Author-X-Name-First: Michael Author-X-Name-Last: Plante, 2013. "TheLong-RunMacroeconomicImpactsofFuelSubsidies," Caepr Working Papers 2013-002, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  7. Buffie, Edward F. & O'Connell, Stephen A. & Adam, Christopher, 2010. "Fiscal inertia, donor credibility, and the monetary management of aid surges," Journal of Development Economics, Elsevier, vol. 93(2), pages 287-298, November.
  8. Hisali, Eria, 2010. "Fiscal policy consistency and its implications for macroeconomic aggregates: The case of Uganda," Research Series 113615, Economic Policy Research Centre (EPRC).
  9. Andrew Berg & Rafael A Portillo & Luis-Felipe Zanna, 2014. "Policy Responses to Aid Surges in Countries with Limited International Capital Mobility: The Role of the Exchange Rate Regime," IMF Working Papers 14/18, International Monetary Fund.
  10. Pedro M G Martins, . "Capital Inflows Hinder Competitiveness? The Real Exchange Rate in Ethiopia," Discussion Papers 10/07, University of Nottingham, CREDIT.

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