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Exchange Rate Policy and the Management of Official and Private Capital Flows in Africa
Author: Ms. Catherine A Pattillo, Mr. Stephen A. O'Connell, Mr. Christopher S Adam, and Mr. Edward F Buffie
Series:
IMF Working Papers
Volume/Issue:
Volume 2004: Issue 216
Language:
English
Publication Date:
01 Nov 2004
DOI:
https://doi.org/10.5089/9781451875119.001
ISBN:
9781451875119
ISSN:
1018-5941
Pages:
53
Keywords:
WP; exchange rate; current account
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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We focus on the management of highly persistent shocks to aid flows, including PRSP-related increases in net inflows, in three “post-stabilization.” African economies with de jure flexible exchange rates. Such shocks have beneficent long-run effects, but when currency substitution is high they can produce dramatic macroeconomic management problems in the short run. What is the appropriate mix of money and exchange rate targeting in such cases, and what is the role of temporary sterilization? We analyze these issues in an intertemporal optimizing model that allows a portion of aid to be devoted to reducing the government’s seigniorage requirement. This creates a strong link between official aid flows and private capital flows. When the credibility of policymakers’ commitment to low inflation is firm, some degree of dirty floating, with little or no sterilization of increases in the monetary base, is the most attractive approach in the short run.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund