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Aid, growth, and real exchange rate dynamics

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

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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Bibliographic Info

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

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References

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  1. Jagdeep S. Bhandari & Nadeem Ul Haque & Stephen J. Turnovsky, 1990. "Growth, External Debt, and Sovereign Risk in a Small Open Economy," IMF Staff Papers, Palgrave Macmillan, vol. 37(2), pages 388-417, June.
  2. van Wijnbergen, Sweder J G, 1984. "The 'Dutch Disease': A Disease after All?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 94(373), pages 41-55, March.
  3. C. Henry, 2005. "The end of poverty: How we can make it happen in our lifetime," The Review of Black Political Economy, Springer, vol. 33(2), pages 61-68, December.
  4. Delfin S. Go & John Page, 2008. "Africa at a Turning Point? : Growth, Aid, and External Shocks," World Bank Publications, The World Bank, number 6421.
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  8. Shantayanan Devarajan & Vinaya Swaroop & Heng-fu Zou, 1996. "The composition of public expenditure and economic growth," CEMA Working Papers, China Economics and Management Academy, Central University of Finance and Economics 77, China Economics and Management Academy, Central University of Finance and Economics.
  9. Abel, Andrew B., 1980. "Empirical investment equations : An integrative framework," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 12(1), pages 39-91, January.
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  14. Devarajan, Shantayanan & Go, Delfin S. & Hongyi Li, 1999. "Quantifying the fiscal effects of trade reform," Policy Research Working Paper Series 2162, The World Bank.
  15. van der Ploeg, Frederick, 1996. "Budgetary Policies, Foreign Indebtedness, the Stock Market, and Economic Growth," Oxford Economic Papers, Oxford University Press, vol. 48(3), pages 382-96, July.
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  17. Heller, Peter S. & Katz, Menachem & Debrun, Xavier & Thomas, Theo & Koranchelian, Taline & Adenauer, Isabell, 2006. "Making Fiscal Space Happen! Managing Fiscal Policy in a World of Scaled-Up Aid," Working Paper Series RP2006/125, World Institute for Development Economic Research (UNU-WIDER).
  18. Filmer, Deon & Hammer, Jeffrey S & Pritchett, Lant H, 2000. "Weak Links in the Chain: A Diagnosis of Health Policy in Poor Countries," World Bank Research Observer, World Bank Group, World Bank Group, vol. 15(2), pages 199-224, August.
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  20. Devarajan, Shantayanan, 1997. "Real Exchange Rate Misalignment in the CFA Zone," Journal of African Economies, Centre for the Study of African Economies (CSAE), Centre for the Study of African Economies (CSAE), vol. 6(1), pages 35-53, March.
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  22. Andrew Berg & Mumtaz Hussain & Shaun K. Roache & Amber Mahone & Tokhir N. Mirzoev & Shekhar Aiyar, 2007. "The Macroeconomics of Scaling Up Aid," IMF Occasional Papers 253, International Monetary Fund.
  23. David Roodman, 2004. "The Anarchy of Numbers: Aid, Development, and Cross-country Empirics," Development and Comp Systems 0412003, EconWPA.
  24. Devaragan, Shantayanan & Lewis, Jeffrey D. & Robinson, Sherman, 1990. "Policy lessons from trade-focused, two-sector models," Journal of Policy Modeling, Elsevier, Elsevier, vol. 12(4), pages 625-657.
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Cited by:
  1. Valerie Cerra & Serpil Tekin & Stephen Turnovsky, 2009. "Foreign Transfers and Real Exchange Rate Adjustments in a Financially Constrained Dependent Economy," Open Economies Review, Springer, vol. 20(2), pages 147-181, April.

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