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Aid, growth, and real exchange rate dynamics

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Author Info
Devarajan, Shantayanan
Go, Delfin S.
Page, John
Robinson, Sherman
Thierfelder, Karen

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Abstract

Devarajan, Go, Page, Robinson, and Thierfelder argued that if aid is about the future and recipients are able to plan consumption and investment decisions optimally over time, then the potential problem of an aid-induced appreciation of the real exchange rate (Dutch disease) does not occur. In their paper,"Aid, Growth and Real Exchange Rate Dynamics,"this key result is derived without requiring extreme assumptions or additional productivity story. The economic framework is a standard neoclassical growth model, based on the familiar Salter-Swan characterization of an open economy, with full dynamic savings and investment decisions. It does require that the model is fully dynamic in both savings and investment decisions. An important assumption is that aid should be predictable for intertemporal smoothing to take place. If aid volatility forces recipients to be constrained and myopic, Dutch disease problems become an issue.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4480.

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Date of creation: 01 Jan 2008
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Handle: RePEc:wbk:wbrwps:4480

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Related research
Keywords: Economic Theory&Research; Debt Markets; Currencies and Exchange Rates; Emerging Markets;

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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.
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    Other versions:
  7. Tanzi, Vito, 1986. "Fiscal Policy Responses to Exogenous Shocks in Developing Countries," American Economic Review, American Economic Association, vol. 76(2), pages 88-91, May. [Downloadable!] (restricted)
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    Other versions:
  12. Abel, Andrew B., 1980. "Empirical investment equations : An integrative framework," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 12(1), pages 39-91, January. [Downloadable!] (restricted)
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  15. Devaragan, Shantayanan & Lewis, Jeffrey D. & Robinson, Sherman, 1990. "Policy lessons from trade-focused, two-sector models," Journal of Policy Modeling, Elsevier, vol. 12(4), pages 625-657. [Downloadable!] (restricted)
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