IDEAS home Printed from https://ideas.repec.org/p/ags/pugtwp/332129.html
   My bibliography  Save this paper

Aid, Growth, and Real Exchange Rate Dynamics

Author

Listed:
  • Devarajan, Shantayanan
  • Go, Delfin S.
  • Robinson, Sherman
  • Thierfelder, Karen

Abstract

We argue 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. Furthermore, greater economic flexibility and an increasing degree of integration to the global economy will intensify the changes in the real exchange rate as well as investment, consumption and exports. This key result is derived without requiring additional assumptions such as exogenous or endogenous productivity growth. 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. In short, any unfavorable macroeconomic dynamics of scaled-up aid are the result of donor behavior rather than the functioning of recipient economies.

Suggested Citation

  • Devarajan, Shantayanan & Go, Delfin S. & Robinson, Sherman & Thierfelder, Karen, 2011. "Aid, Growth, and Real Exchange Rate Dynamics," Conference papers 332129, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:332129
    as

    Download full text from publisher

    File URL: https://ageconsearch.umn.edu/record/332129/files/5480.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. William Easterly, 2002. "The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262550423, December.
    2. L. ALAN WINTERS & NEIL McCULLOCH & ANDREW McKAY, 2015. "Trade Liberalization and Poverty: The Evidence So Far," World Scientific Book Chapters, in: Non-Tariff Barriers, Regionalism and Poverty Essays in Applied International Trade Analysis, chapter 14, pages 271-314, World Scientific Publishing Co. Pte. Ltd..
    3. Sorda, Giovanni & Banse, Martin & Kemfert, Claudia, 2010. "An overview of biofuel policies across the world," Energy Policy, Elsevier, vol. 38(11), pages 6977-6988, November.
    4. Jeffrey Sachs & Daniel Cohen, 1982. "LDC Borrowing with Default Risk," NBER Working Papers 0925, National Bureau of Economic Research, Inc.
    5. C. Henry, 2005. "The end of poverty: How we can make it happen in our lifetime," The Review of Black Political Economy, Springer;National Economic Association, vol. 33(2), pages 61-68, December.
    6. 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.
    7. David Roodman, 2007. "The Anarchy of Numbers: Aid, Development, and Cross-Country Empirics," The World Bank Economic Review, World Bank, vol. 21(2), pages 255-277, May.
    8. Benjamin, Nancy C. & Devarajan, Shantayanan & Weiner, Robert J., 1989. "The Dutch disease in a developing country : Oil reserves in Cameroon," Journal of Development Economics, Elsevier, vol. 30(1), pages 71-92, January.
    9. Ho, Mun S. & Jorgenson, Dale W., 1994. "Trade policy and U.S. economic growth," Journal of Policy Modeling, Elsevier, vol. 16(2), pages 119-146, April.
    10. Balassa, Bela, 1986. "Policy Responses to Exogenous Shocks in Developing Countries," American Economic Review, American Economic Association, vol. 76(2), pages 75-78, May.
    11. 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.
    12. Devarajan, Shantayanan & Swaroop, Vinaya & Heng-fu, Zou, 1996. "The composition of public expenditure and economic growth," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 313-344, April.
    13. Mr. Andrew Berg & Mr. Mumtaz Hussain & Mr. Shaun K. Roache & Ms. Amber A Mahone & Mr. Tokhir N Mirzoev & Mr. Shekhar Aiyar, 2007. "The Macroeconomics of Scaling Up Aid: Lessons from Recent Experience," IMF Occasional Papers 2007/002, International Monetary Fund.
    14. Devarajan, Shantayanan, 1997. "Real Exchange Rate Misalignment in the CFA Zone," Journal of African Economies, Centre for the Study of African Economies, vol. 6(1), pages 35-53, March.
    15. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
    16. Thomas W. Hertel & Wallace E. Tyner & Dileep K. Birur, 2010. "The Global Impacts of Biofuel Mandates," The Energy Journal, , vol. 31(1), pages 75-100, January.
    17. van Wijnbergen, Sweder J G, 1984. "The 'Dutch Disease': A Disease after All?," Economic Journal, Royal Economic Society, vol. 94(373), pages 41-55, March.
    18. Filmer, Deon & Hammer, Jeffrey S & Pritchett, Lant H, 2000. "Weak Links in the Chain: A Diagnosis of Health Policy in Poor Countries," The World Bank Research Observer, World Bank, vol. 15(2), pages 199-224, August.
    19. Devarajan, Shantayanan & Lewis, Jeffrey & Robinson, Sherman, 1990. "Policy Lessons from Two-Sector Models," CUDARE Working Papers 198566, University of California, Berkeley, Department of Agricultural and Resource Economics.
    20. Peter S. Heller & Menachem Katz & Xavier Debrun & Theo Thomas & Taline Koranchelian & Isabell Adenauer, 2006. "Making Fiscal Space Happen!: Managing Fiscal Policy in a World of Scaled-Up Aid," WIDER Working Paper Series RP2006-125, World Institute for Development Economic Research (UNU-WIDER).
    21. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 48(2), pages 289-309.
    22. Martin Banse & Hans van Meijl & Andrzej Tabeau & Geert Woltjer, 2008. "Will EU biofuel policies affect global agricultural markets?," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 35(2), pages 117-141, June.
    23. 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.
    24. Burniaux, Jean-Marc & Truong Truong, 2002. "GTAP-E: An Energy-Environmental Version of the GTAP Model," GTAP Technical Papers 923, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
    25. Eickhout, Bas & van Meijl, Hans & Tabeau, Andrzej & Stehfest, Elke, 2008. "The Impact of Environmental and Climate Constraints on Global Food Supply," GTAP Working Papers 2608, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
    26. Delfin S. Go & John Page, 2008. "Africa at a Turning Point? : Growth, Aid, and External Shocks," World Bank Publications - Books, The World Bank Group, number 6421, December.
    27. Devarajan, Shantayanan & Go, Delfin S. & Hongyi Li, 1999. "Quantifying the fiscal effects of trade reform," Policy Research Working Paper Series 2162, The World Bank.
    28. 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.
    29. Burniaux, Jean-March & Truong, Truong P., 2002. "Gtap-E: An Energy-Environmental Version Of The Gtap Model," Technical Papers 28705, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    30. Hertel, Thomas, 1997. "Global Trade Analysis: Modeling and applications," GTAP Books, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, number 7685, December.
    31. 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 382-396, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Matthias Helble & Catherine Mann & John Wilson, 2012. "Aid-for-trade facilitation," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 148(2), pages 357-376, June.
    2. 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 Business School.
    3. 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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Banse, Martin & Rothe, Andrea & Tabeau, Andrzej & Meijl, Hans van & Woltjer, Geert, 2013. "Will improved access to capital dampen the need for more agricultural land? A CGE analysis of agricultural capital markets and world-wide biofuel policies," Working papers 155706, Factor Markets, Centre for European Policy Studies.
    2. Arndt, Channing & Davies, Rob & Makrelov, Konstantin & Thurlow, James, 2011. "Low Carbon Development and Carbon Taxes in South Africa," Conference papers 332130, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    3. Huang, Jikun & Yang, Jun & Msangi, Siwa & Rozelle, Scott & Weersink, Alfons, 2012. "Biofuels and the poor: Global impact pathways of biofuels on agricultural markets," Food Policy, Elsevier, vol. 37(4), pages 439-451.
    4. Weslem Rodrigues Faria & Eduardo Amaral Haddad, 2017. "Modeling Land Use And The Effects Of Climate Change In Brazil," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 8(01), pages 1-37, February.
    5. Mwaura, Francis, 2014. "Understanding dynamism of land ownership, use and patterns of allocation for the locals before inviting foreign investors: the Ugandan case," Conference papers 332543, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    6. Houba, Harold & Kremers, Hans, 2007. "Bargaining for an efficient and fair allocation of emission permits to developing countries," Conference papers 331600, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    7. Huang, Jikun & Yang, Jun & Msangi, Siwa & Rozelle, Scott & Weersink, Alfons, 2012. "Global biofuel production and poverty in China," Applied Energy, Elsevier, vol. 98(C), pages 246-255.
    8. Hoefnagels, Ric & Banse, Martin & Dornburg, Veronika & Faaij, André, 2013. "Macro-economic impact of large-scale deployment of biomass resources for energy and materials on a national level—A combined approach for the Netherlands," Energy Policy, Elsevier, vol. 59(C), pages 727-744.
    9. Belloc, Marianna & Federici, Daniela, 2010. "A two-country NATREX model for the euro/dollar," Journal of International Money and Finance, Elsevier, vol. 29(2), pages 315-335, March.
    10. Hertel, Thomas W. & Tyner, Wallace E. & Birur, Dileep K., 2008. "Biofuels for all? Understanding the Global Impacts of Multinational Mandates," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6526, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    11. Alvaro Calzadilla & Katrin Rehdanz & Richard Betts & Pete Falloon & Andy Wiltshire & Richard Tol, 2013. "Climate change impacts on global agriculture," Climatic Change, Springer, vol. 120(1), pages 357-374, September.
    12. Tetsuji Tanaka & Nobuhiro Hosoe, 2011. "What Drove the Crop Price Hikes in the Food Crisis?," GRIPS Discussion Papers 11-16, National Graduate Institute for Policy Studies.
    13. Thierry Brunelle & Patrice Dumas, 2012. "Can Numerical Models Estimate Indirect Land-use Change?," Working Papers 2012.65, Fondazione Eni Enrico Mattei.
    14. Michetti, Melania & Parrado, Ramiro, 2012. "Improving Land-use modelling within CGE to assess Forest-based Mitigation Potential and Costs," Climate Change and Sustainable Development 122862, Fondazione Eni Enrico Mattei (FEEM).
    15. María Blanco & Marcel Adenäuer & Shailesh Shrestha & Arno Becker, 2012. "Methodology to assess EU Biofuel Policies: The CAPRI Approach," JRC Research Reports JRC80037, Joint Research Centre.
    16. Chung, Keunsuk & Turnovsky, Stephen J., 2010. "Foreign debt supply in an imperfect international capital market: Theory and evidence," Journal of International Money and Finance, Elsevier, vol. 29(2), pages 201-223, March.
    17. Nyambuu, Unurjargal & Semmler, Willi, 2017. "Emerging markets’ resource booms and busts, borrowing risk and regime change," Structural Change and Economic Dynamics, Elsevier, vol. 41(C), pages 29-42.
    18. Dixon, Peter & van Meijl, Hans & Rimmer, Maureen & Shutes, Lindsay & Tabeau, Andrzej, 2013. "RED vs. REDD: Biofuel Policy vs. Forest Conservation," Working papers 152082, Factor Markets, Centre for European Policy Studies.
    19. Panichelli, Luis & Gnansounou, Edgard, 2015. "Impact of agricultural-based biofuel production on greenhouse gas emissions from land-use change: Key modelling choices," Renewable and Sustainable Energy Reviews, Elsevier, vol. 42(C), pages 344-360.
    20. Tabeau, Andrzej A. & van Meijl, Hans & Banse, Martin & Woltjer, Geert B., 2008. "Agricultural Incomes Development in EU till 2030: Scenario Analysis of Main Driving Factors," 108th Seminar, February 8-9, 2008, Warsaw, Poland 48115, European Association of Agricultural Economists.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:pugtwp:332129. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: AgEcon Search (email available below). General contact details of provider: https://edirc.repec.org/data/gtpurus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.