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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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  1. Bazoumana Ouattara & Eric Strobl, 2008. "Foreign Aid Inflows And The Real Exchange Rate In The Cfa Franc Zone," Economie Internationale, CEPII research center, issue 116, pages 37-52.
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  13. Kiminori Matsuyama, 1990. "Agricultural Productivity, Comparative Advantage, and Economic Growth," Discussion Papers 934, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  17. Raghuram G. Rajan & Arvind Subramanian, 2014. "Aid, Dutch Disease, and Manufacturing Growth," Working Papers id:6192, eSocialSciences.
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  27. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Closing Small Open Economy Models," Departmental Working Papers 200115, Rutgers University, Department of Economics.
  28. Rafael Portillo & Andrew Berg & Jan Gottschalk & Luis-Felipe Zanna, 2010. "The Macroeconomics of Medium-Term Aid Scaling-Up Scenarios," IMF Working Papers 10/160, International Monetary Fund.
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  31. Luis-Felipe Zanna & Andrew Berg & Tokhir Mirzoev & Rafael Portillo, 2010. "The Short-Run Macroeconomics of Aid Inflows; Understanding the Interaction of Fiscal and Reserve Policy," IMF Working Papers 10/65, International Monetary Fund.
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