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Policy Responses to Aid Surges in Countries with Limited International Capital Mobility: The Role of the Exchange Rate Regime
Author:
Mr. Andrew Berg
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,
Mr. Rafael A Portillo
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, and
Luis-Felipe Zanna
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Series:
IMF Working Papers
Volume/Issue:
Volume 2014: Issue 018
Language:
English
Publication Date:
30 Jan 2014
DOI:
https://doi.org/10.5089/9781484397008.001
ISBN:
9781484397008
ISSN:
1018-5941
Pages:
41
Keywords:
WP; exchange rate; central bank; managed float; Africa; Aid; Exchange Rate Regimes; Reserve Accumulation Policies; Sterilization Policies; Transfer Problem; appreciation pressure; nominal exchange rate; depreciation rate; managed float regime; nominal interest rate; open economy; inflation expectation; real gross domestic product; transmission mechanism; expenditure switching; flexible exchange rate regime; reserve holding; Exchange rate arrangements; Reserves accumulation; Sterilization; Conventional peg; Exchange rate flexibility; Sub-Saharan Africa
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 study the role of the exchange rate regime, reserve accumulation, and sterilization policies in the macroeconomics of aid surges. Absent sterilization, a peg allows for almost full aid absorption — an increase in the current account deficit net of aid—delivering the same effects as those of a flexible regime but with a necessary increase in inflation. Regardless of the regime, policies that limit absorption—and result in large accumulation of reserves—are welfare reducing: they help reduce the real appreciation (and inflation under the peg), but at the expense of reducing private consumption and investment, and therefore medium-term growth.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund