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

Listed author(s):
  • 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
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. Torvik, Ragnar, 2001. "Learning by doing and the Dutch disease," European Economic Review, Elsevier, vol. 45(2), pages 285-306, February.
  2. 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.
  3. David Dollar & Craig Burnside, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September.
  4. Xavier Sala-i-Martin & Arvind Subramanian, 2003. "Addressing the Natural Resource Curse: An Illustration from Nigeria," NBER Working Papers 9804, National Bureau of Economic Research, Inc.
  5. Hansen, Henrik & Tarp, Finn, 1999. "Aid Effectiveness Disputed," MPRA Paper 62290, University Library of Munich, Germany.
  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. Jeffrey D. Sachs & Andrew M. Warner, 1995. "Natural Resource Abundance and Economic Growth," NBER Working Papers 5398, National Bureau of Economic Research, Inc.
  8. Svensson, Jakob, 1998. "Foreign aid and rent-seeking," Policy Research Working Paper Series 1880, The World Bank.
  9. 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.
  10. Raghuram G. Rajan & Arvind Subramanian, 2014. "What Undermines Aid’s Impact on Growth?," Working Papers id:6191, eSocialSciences.
  11. Raghuram G. Rajan & Arvind Subramanian, 2005. "What Undermines Aid's Impact on Growth?," NBER Working Papers 11657, National Bureau of Economic Research, Inc.
  12. Carmen M. Reinhart & Kenneth S. Rogoff, 2002. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," NBER Working Papers 8963, National Bureau of Economic Research, Inc.
  13. 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.
  14. Philip R. Lane & Aaron Tornell, 1999. "The Voracity Effect," American Economic Review, American Economic Association, vol. 89(1), pages 22-46, March.
  15. 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.
  16. 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.
  17. Easterly, William & Fischer, Stanley, 2000. "Inflation and the poor," Policy Research Working Paper Series 2335, The World Bank.
  18. Ale Bulir & A. Javier Hamann, 2003. "Aid Volatility: An Empirical Assessment," IMF Staff Papers, Palgrave Macmillan, vol. 50(1), pages 4-4.
  19. Timothy D. Lane & Ales Bulir, 2002. "Aid and Fiscal Management," IMF Working Papers 02/112, International Monetary Fund.
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