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

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

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/devec

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