The Macroeconomic Management of Increased Aid: Policy Lessons from Recent Experience
This paper investigates the macroeconomic challenges created by a surge in aid inflows. It develops an analytical framework for examining possible policy responses to increased aid, in terms of absorption and spending of aid?where the central bank controls absorption through monetary policy and the sale of foreign exchange and the fiscal authority controls spending. Different combinations of absorption and spending lead to different macroeconomic consequences. Evidence from five countries that recently experienced an aid surge (Ethiopia, Ghana, Tanzania, Mozambique and Uganda) shows no support for aid-related real exchange rate appreciation in these countries, but indicates that the fear of Dutch disease played an important part in the policy reaction to aid surges. Fiscal and monetary authorities should coordinate their responses to an aid surge, because an uncoordinated response?typically when fiscal authority wants to spend aid while the central bank wants to avoid exchange rate appreciation?can have serious negative macroeconomic consequences.
|Date of creation:||2008|
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Web page: http://www.wider.unu.edu/
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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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- Christopher Adam & Stephen O’Connell & Edward Buffie, 2007. "Monetary Policy Rules For Manging Aid Surges In Africa," WEF Working Papers 0016, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
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- Ale Bulir & A. Javier Hamann, 2003. "Aid Volatility: An Empirical Assessment," IMF Staff Papers, Palgrave Macmillan, vol. 50(1), pages 1-4.
- 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.
- Catherine A Pattillo & Stephen A. O'Connell & Christopher S Adam & Edward F Buffie, 2004. "Exchange Rate Policy and the Management of Official and Private Capital Flows in Africa," IMF Working Papers 04/216, International Monetary Fund.
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