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Policy Responses to Aid Surges in Countries with Limited International Capital Mobility: The Role of the Exchange Rate Regime

  • Andrew Berg
  • Rafael A Portillo
  • Luis-Felipe Zanna

We study the role of the exchange rate regime, reserve accumulation, and sterilization policies in the macroeconomics of aid surges. Absent sterilization, a peg allows for almost full aid absorption — an increase in the current account deficit net of aid—delivering the same effects as those of a flexible regime but with a necessary increase in inflation. Regardless of the regime, policies that limit absorption—and result in large accumulation of reserves—are welfare reducing: they help reduce the real appreciation (and inflation under the peg), but at the expense of reducing private consumption and investment, and therefore medium-term growth.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 14/18.

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Length: 41
Date of creation: 30 Jan 2014
Date of revision:
Handle: RePEc:imf:imfwpa:14/18
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