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Macroeconomic Aspects of the Effectiveness of Foreign Aid: On the Two-Gap Model, Home Goods Disequilibrium and Real Exchange Rate Misalignment

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  • van Wijnbergen, Sweder

Abstract

We construct an open economy disequilibrium model to assess the welfare effects of aid in different macroeconomic regimes. Aid is shown to have different effects in different unemployment regimes because it increases the social costs of wage-price rigidities in the classical regime but decreases them in the Keynesian unemployment regime. A link is made with the two-gap model, but we highlight the role of real exchange rate misalignment (failure to clear the NT goods market).

Suggested Citation

  • 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.
    • Handle: RePEc:cpr:ceprdp:45
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    Cited by:

    1. Sebastian Edwards, 2015. "Economic Development and the Effectiveness of Foreign Aid: A Historical Perspective," Kyklos, Wiley Blackwell, vol. 68(3), pages 277-316, August.
    2. Mr. James McHugh & Mr. Theodora Kosma & Mr. Dimitri G Demekas, 2002. "The Economics of Post Conflict Aid," IMF Working Papers 2002/198, International Monetary Fund.
    3. Alexandra Jarotschkin & Aart Kraay, 2016. "Aid, Disbursement Delays, and the Real Exchange Rate," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 64(2), pages 217-238, June.
    4. Richard Chisik & Nazanin Behzadan & Harun Onder & Apurva Sanghi, 2016. "Aid, Remittances, the Dutch Disease, Refugees, and Kenya," Working Papers 062, Ryerson University, Department of Economics.
    5. Sèna Kimm Gnangnon, 2020. "Development aid, remittances inflows and wages in the manufacturing sector," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 22(2), pages 278-304, December.
    6. Pedro M G Martins, 2010. "Capital Inflows Hinder Competitiveness? The Real Exchange Rate in Ethiopia," Discussion Papers 10/07, University of Nottingham, CREDIT.
    7. Sin-Yu Ho, 2018. "Analysing the sources of growth in an emerging market economy: the Thailand experience," International Journal of Sustainable Economy, Inderscience Enterprises Ltd, vol. 10(4), pages 340-359.
    8. Chance Mwabutwa & Nicola Viegi & Manoel Bittencourt, 2012. "Monetary Policy Response to Capital Inflows in Form of Foreign Aid in Malawi," Working Papers 201232, University of Pretoria, Department of Economics.
    9. Bosello, Francesco & Parrado, Ramiro & Rosa, Renato, 2011. "The role of REDD in a Copenhagen Carbon Market," Conference papers 332074, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    10. H. Issa & B. Ouattara, 2008. "Foreign Aid Flows And Real Exchange Rate: Evidence From Syria," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 33(1), pages 133-146, June.
    11. Rajan, Raghuram G. & Subramanian, Arvind, 2011. "Aid, Dutch disease, and manufacturing growth," Journal of Development Economics, Elsevier, vol. 94(1), pages 106-118, January.
    12. Laplagne, Patrick & Treadgold, Malcolm & Baldry, Jonathan, 2001. "A Model of Aid Impact in Some South Pacific Microstates," World Development, Elsevier, vol. 29(2), pages 365-383, February.
    13. Gnangnon, Sèna Kimm, 2020. "Development Aid, Remittances Inflows and Wages in the Manufacturing Sector of Recipient-Countries," EconStor Preprints 213439, ZBW - Leibniz Information Centre for Economics.
    14. Richard Chisik & Nazanin Behzadan, 2016. "Are Aid and Remittances Similar in Generating the Dutch Disease?," Working Papers 064, Ryerson University, Department of Economics.
    15. 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.
    16. Binetti, Marco Nicola, 2023. "Rebuilding energy infrastructures and the manufacturing sector in post-conflict countries," Energy Policy, Elsevier, vol. 172(C).
    17. Pedro Martins, 2011. "Do large capital inflows hinder competitiveness? The Dutch disease in Ethiopia," Post-Print hal-00748067, HAL.
    18. repec:rye:wpaper:wp071 is not listed on IDEAS
    19. Nuno Baetas da Silva & João Sousa Andrade & António Portugal Duarte, 2016. "Alternative Sources of Dutch Disease: A Survey of the Literature," GEMF Working Papers 2016-10, GEMF, Faculty of Economics, University of Coimbra.
    20. Hühne, Philipp & Meyer, Birgit & Nunnenkamp, Peter, 2014. "Aid for trade: Assessing the effects on recipient exports of manufactures and primary commodities to donors and non-donors," Kiel Working Papers 1953, Kiel Institute for the World Economy (IfW Kiel).
    21. Teferi, Mequanite, 2009. "Aid and the Dutch-Disease in Ethiopia," Ethiopian Journal of Economics, Ethiopian Economics Association, vol. 16(2), pages 1-99, February.
    22. Jansen, Karel, 1995. "The macroeconomic effects of direct foreign investment: The case of Thailand," World Development, Elsevier, vol. 23(2), pages 193-210, February.
    23. Nuno Baetas da Silva & João Sousa Andrade & António Portugal Duarte, 2016. "Alternative Sources of Dutch Disease: A Survey of the Literature," GEMF Working Papers 2016-10, GEMF, Faculty of Economics, University of Coimbra.
    24. Cassimon, D & Renard, Robrecht, 2003. "Fiscal ownership and the role of donors: will HIPC matter?," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34940, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).

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