The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
A low-income country such as Haiti that confronts an environment of diminishing aid
inflows must assess tradeoffs among the available policy options: spending cuts,
monetization, sales of debt, or use of foreign reserves. To provide the analytical tools for
this task, the paper draws from a set of DSGE models recently developed to evaluate
policy choices in low-income countries for which external aid flows represent an
important revenue source. Two simplified stylized variations of the main model are used
to gain intuition and initially assess the trdeaoffs. Subsequenctly a full-scale small open
economy DSGE model, calibrated to match conditions in Haiti and in similar low-income
countries, is employed. Several key results are common to all model versions. While sales
of foreign exchange reserves can compensate for the loss of aid inflows, this strategy is
not sustainable. The remaining policy choices entail larger welfare costs, involving lower
consumption levels and real depreciation. The results suggest that a mixture of spending
cuts and depreciation is the best strategy, when use of foreign reserves is constrained.