What is the Most Effective Monetary Policy for Aid-Receiving Countries?

Alessandro Prati and Thierry Tressel ()

Working Papers from United Nations, Department of Economics and Social Affairs

Abstract: This paper analyses how monetary policy can enhance the effectiveness of volatile aid fl ows. We find that monetary policy is effective in reducing trade balance volatility. We propose the following taxonomy, excluding the case of emergency assistance. Monetary policy should slow down consumption growth and build up international reserves when aid is abundant and deplete them to finance imports and support consumption when aid is scarce. If foreign aid also affects productivity growth, monetary policy should take this productivity effect into account in responding to aid flows.

Keywords: Aid effectiveness; monetary policy; real exchange rate; Dutch disease (search for similar items in EconPapers)
JEL-codes: O11 O4 O23 E5 F35 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-afr, nep-cba, nep-dev, nep-mac, nep-mon and nep-sea
Date: 2006-02
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