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Aid, disbursement delays, and the real exchange rate

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  • Jarotschkin, Alexandra
  • Kraay, Aart

Abstract

Aid donors and recipients have long been concerned that aid inflows may lead to an appreciation of the real exchange rate and an associated loss of competitiveness. This paper provides new evidence of the dynamic effects of aid on the real exchange rate, using an identification strategy that exploits the long delays between the approval of aid projects and the subsequent disbursements on them. These disbursement delays enable the isolation of a source of variation in aid inflows that is uncorrelated with contemporaneous macroeconomic shocks that may drive both aid and the real exchange rate. Using this predetermined component of aid as an instrument, there is little evidence that aid inflows lead to significant real exchange rate appreciations.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6501.

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Date of creation: 01 Jun 2013
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Handle: RePEc:wbk:wbrwps:6501

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Keywords: Macroeconomic Management; Debt Markets; Economic Stabilization; Emerging Markets; Economic Theory&Research;

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  1. Douglas Staiger & James H. Stock, 1994. "Instrumental Variables Regression with Weak Instruments," NBER Technical Working Papers 0151, National Bureau of Economic Research, Inc.
  2. Corden, W Max & Neary, J Peter, 1982. "Booming Sector and De-Industrialisation in a Small Open Economy," Economic Journal, Royal Economic Society, vol. 92(368), pages 825-48, December.
  3. Òscar Jordà, 2005. "Estimation and Inference of Impulse Responses by Local Projections," American Economic Review, American Economic Association, vol. 95(1), pages 161-182, March.
  4. Elbadawi, Ibrahim A, 1999. "External Aid: Help or Hindrance to Export Orientation in Africa?," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 8(4), pages 578-616, December.
  5. Mumtaz Hussain & Andrew Berg & Shekhar Aiyar, 2009. "The Macroeconomic Management of Increased Aid: Policy Lessons from Recent Experience," Review of Development Economics, Wiley Blackwell, vol. 13(s1), pages 491-509, 08.
  6. van Wijnbergen, Sweder, 1985. "Macroeconomic Aspects of the Effectiveness of Foreign Aid: On the Two-Gap Model, Home Goods Disequilibrium and Real Exchange Rate Misalignment," CEPR Discussion Papers 45, C.E.P.R. Discussion Papers.
  7. Lone Engbo Christiansen & Alessandro Prati & Luca Antonio Ricci & Thierry Tressel, 2009. "External Balance in Low Income Countries," IMF Working Papers 09/221, International Monetary Fund.
  8. Torvik, Ragnar, 2001. "Learning by doing and the Dutch disease," European Economic Review, Elsevier, vol. 45(2), pages 285-306, February.
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