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What is the Most Effective Monetary Policy for Aid-Receiving Countries?

  • Alessandro Prati
  • Thierry Tressel

This paper analyses how monetary policy can enhance the effectiveness of volatile aid fl ows. We find that monetary policy is effective in reducing trade balance volatility. We propose the following taxonomy, excluding the case of emergency assistance. Monetary policy should slow down consumption growth and build up international reserves when aid is abundant and deplete them to finance imports and support consumption when aid is scarce. If foreign aid also affects productivity growth, monetary policy should take this productivity effect into account in responding to aid flows.

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File URL: http://www.un.org/esa/desa/papers/2006/wp12_2006.pdf
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Paper provided by United Nations, Department of Economics and Social Affairs in its series Working Papers with number 12.

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Length: 16 pages
Date of creation: Feb 2006
Date of revision:
Handle: RePEc:une:wpaper:12
Contact details of provider: Web page: http://www.un.org/en/development/desa/working-papers.html
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  1. Christopher S. Adam & David L. Bevan, 2003. "Aid, Public Expenditure and Dutch Disease," CSAE Working Paper Series 2003-02, Centre for the Study of African Economies, University of Oxford.
  2. Arvind Subramanian & Xavier Sala-i-Martin, 2003. "Addressing the Natural Resource Curse; An Illustration From Nigeria," IMF Working Papers 03/139, International Monetary Fund.
  3. Timothy D. Lane & Ales Bulir, 2002. "Aid and Fiscal Management," IMF Working Papers 02/112, International Monetary Fund.
  4. Easterly, William & Fischer, Stanley, 2001. "Inflation and the Poor," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 160-78, May.
  5. Sachs, J-D & Warner, A-M, 1995. "Natural Resource Abundance and Economic Growth," Papers 517a, Harvard - Institute for International Development.
  6. Johannes Van Biesebroeck, 2003. "Exporting Raises Productivity in Sub-Saharan African Manufacturing Plants," NBER Working Papers 10020, National Bureau of Economic Research, Inc.
  7. Henrik Hansen & Finn Tarp, 2000. "Aid effectiveness disputed," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 375-398, 04.
  8. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 1-48.
  9. Boyd, John H. & Levine, Ross & Smith, Bruce D., 2001. "The impact of inflation on financial sector performance," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 221-248, April.
  10. Torvik, Ragnar, 2001. "Learning by doing and the Dutch disease," European Economic Review, Elsevier, vol. 45(2), pages 285-306, February.
  11. David Dollar & Craig Burnside, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September.
  12. Edward Buffie & Christopher Adam & Stephen O'Connell & Catherine Pattillo, 2004. "Exchange Rate Policy and the Management of Official and Private Capital Flows in Africa," IMF Staff Papers, Palgrave Macmillan, vol. 51(s1), pages 126-160, June.
  13. Raghuram G. Rajan & Arvind Subramanian, 2005. "What Undermines Aid's Impact on Growth?," NBER Working Papers 11657, National Bureau of Economic Research, Inc.
  14. Gylfason, Thorvaldur & Herbertsson, Tryggvi Thor & Zoega, Gylfi, 1997. "A Mixed Blessing: Natural Resources and Economic Growth," CEPR Discussion Papers 1668, C.E.P.R. Discussion Papers.
  15. Svensson, Jakob, 2000. "Foreign aid and rent-seeking," Journal of International Economics, Elsevier, vol. 51(2), pages 437-461, August.
  16. Arvind Subramanian & Raghuram Rajan, 2005. "What Undermines Aid’s Impact on Growth?," IMF Working Papers 05/126, International Monetary Fund.
  17. Philip R. Lane & Aaron Tornell, 1999. "The Voracity Effect," American Economic Review, American Economic Association, vol. 89(1), pages 22-46, March.
  18. Ale Bulir & A. Javier Hamann, 2003. "Aid Volatility: An Empirical Assessment," IMF Staff Papers, Palgrave Macmillan, vol. 50(1), pages 4.
  19. Blalock, Garrick & Gertler, Paul J., 2004. "Learning from exporting revisited in a less developed setting," Journal of Development Economics, Elsevier, vol. 75(2), pages 397-416, December.
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