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Exchange Rate Policy and the Management of official and Private Capital Flows in Africa

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

We focus on the management of highly persistent shocks to aid flows, including PRSP-related increases in net inflows, in three “post-stabilization.” African economies with de jure flexible exchange rates. Such shocks have beneficent long-run effects, but when currency substitution is high they can produce dramatic macroeconomic management problems in the short run. What is the appropriate mix of money and exchange rate targeting in such cases, and what is the role of temporary sterilization? We analyze these issues in an intertemporal optimizing model that allows a portion of aid to be devoted to reducing the government’s seigniorage requirement. This creates a strong link between official aid flows and private capital flows. When the credibility of policymakers’ commitment to low inflation is firm, some degree of dirty floating, with little or no sterilization of increases in the monetary base, is the most attractive approach in the short run.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/216.

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Length: 53
Date of creation: 01 Nov 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/216
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  1. Reinhart, Carmen & Calvo, Guillermo & Vegh, Carlos, 1994. "Targeting the real exchange rate: Theory and evidence," MPRA Paper 13412, University Library of Munich, Germany.
  2. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1994. "The Capital Inflows Problem: Concepts And Issues," Contemporary Economic Policy, Western Economic Association International, vol. 12(3), pages 54-66, 07.
  3. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  4. Reinhart, Carmen & Calvo, Guillermo, 2001. "Fixing for your life," MPRA Paper 13873, University Library of Munich, Germany.
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  6. Svensson, Lars E.O., 1998. "Open-Economy Inflation Targeting," Seminar Papers 638, Stockholm University, Institute for International Economic Studies.
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  9. C. L. Ramirez-Rojas, 1985. "Currency Substitution in Argentina, Mexico, and Uruguay (Substitution de monnaie en Argentine, au Mexique et en Uruguay) (Sustitución de moneda en Argentina, México y Uruguay)," IMF Staff Papers, Palgrave Macmillan, vol. 32(4), pages 629-667, December.
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  12. Craig Burnside & Domenico Fanizza, 2004. "Hiccups for HIPCs?," NBER Working Papers 10903, National Bureau of Economic Research, Inc.
  13. David Fielding, 1994. "Money Demand in Four African Countries," Journal of Economic Studies, Emerald Group Publishing, vol. 21(2), pages 3-37, May.
  14. Benedict J. Clements & Sanjeev Gupta & Emanuele Baldacci & Carlos Mulas-Granados, 2002. "Expenditure Composition, Fiscal Adjustment, and Growth in Low-Income Countries," IMF Working Papers 02/77, International Monetary Fund.
  15. Krishna Srinivasan & Erich Spitäller & M. Braulke & Christian B. Mulder & Hisanobu Shishido & Kenneth M. Miranda & John Dodsworth & Keon Lee, 1996. "Vietnam: Transition to a Market Economy," IMF Occasional Papers 135, International Monetary Fund.
  16. Asea, Patrick K & Reinhart, Carmen M, 1996. "Le Prix de l'Argent: How (Not) to Deal with Capital Inflows," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 5(3), pages 231-71, October.
  17. Adam, Christopher, 1999. "Financial Liberalisation and Currency Demand in Zambia," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 8(3), pages 268-306, October.
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