Monetary Policy Rules for Managing Aid Surges in Africa

Edward F. Buffie, Christopher Adam (), Catherine A. Pattillo and O'Connell, Stephen A.

No 07/180, IMF Working Papers from International Monetary Fund

Abstract: Since the turn of the century, aid flows to Africa have increased on average and become more volatile. As a result, policymakers, particularly in post-stabilization countries where inflation has only recently been brought under control, have been increasingly preoccupied with how best to deploy the available instruments of monetary policy without yielding on hard-won inflation gains. We use a stochastic simulation model, in which private sector currency substitution effects play a central role, to examine the properties of alternative monetary and fiscal policy strategies in the face of volatile aid flows. We show that simple monetary rules, specifically an (unsterilized) exchange rate crawl and a 'reserve buffer plus float'-under which the authorities set a time-varying reserve target corresponding to the unspent portion of aid financing and allow the exchange rate to float freely once this reserve target is satisfied-have attractive properties relative to a range of alternative strategies including those involving heavy reliance on bond sterilization or a commitment to a 'pure' exchange rate float.

Keywords: Working Paper; Development assistance; Monetary policy; Africa; Economic models (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-afr, nep-cba, nep-dev, nep-mac and nep-mon
Date: 2007-07-26
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Working Paper: Monetary Policy Rules For Manging Aid Surges In Africa (2007)
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