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Title:The macroeconomic management of increased aid: Policy lessons from recent experience PDF Logo
Authors:Aiyar, Shekhar
Berg, Andrew
Hussain, Mumtaz
Issue Date:2008
Series/Report no.:Research paper / UNU-WIDER 2008.79
Abstract: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 aidrelated 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.
Subjects:aid
exchange rate
aid absorption
policy
JEL:O11
O23
E52
F35
ISBN:978-92-9230-133-0
Document Type:Working Paper
Appears in Collections:WIDER Research Papers, United Nations University (UNU)

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