Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/45052 
Year of Publication: 
2008
Series/Report no.: 
WIDER Research Paper No. 2008/77
Publisher: 
The United Nations University World Institute for Development Economics Research (UNU-WIDER), Helsinki
Abstract: 
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.
Subjects: 
monetary policy
currency substitution
aid
Africa
DSGE models
JEL: 
O23
E52
F31
F35
ISBN: 
978-92-9230-131-6
Document Type: 
Working Paper

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