Monetary Policy Rules for Managing Aid Surges in Africa
We examine the properties of alternative monetary policy rules in response to large aid surges in low-income countries characterized by incomplete capital market integration and currency substitution. Using a dynamic stochastic general equilibrium model, we show that simple monetary rules that stabilize the path of expected future seigniorage for a given aid flow have attractive properties relative to a range of conventional alternatives, including those involving heavy reliance on bond sterilization or a commitment to a pure exchange rate float. These simple rules, which are shown to be robust across a range of fiscal responses to aid inflows, appear to be consistent with actual responses to recent aid surges in a range of post-stabilization countries in Sub-Saharan Africa.
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- Christopher Adam & Stephen O'Connell & Edward Buffie & Catherine Pattillo, 2009.
"Monetary Policy Rules for Managing Aid Surges in Africa,"
Review of Development Economics,
Wiley Blackwell, vol. 13(s1), pages 464-490, 08.
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