Monetary Policy Rules for Managing Aid Surges in Africa

Christopher Adam, Stephen O'Connell, Edward Buffie and Catherine Pattillo

Review of Development Economics, 2009, vol. 13, issue 3, 464-490

Abstract: This paper examines the properties of alternative monetary policy rules in response to large aid surges in low‐income countries characterized by incomplete capital market integration and currency substitution. Using a dynamic stochastic general equilibrium model, it is shown that simple monetary rules that stabilize the path of expected future seigniorage for a given aid flow have attractive properties relative to a range of conventional alternatives, including those involving heavy reliance on bond sterilization or a commitment to a pure exchange rate float. These simple rules, which are shown to be robust across a range of fiscal responses to aid inflows, appear to be consistent with actual responses to recent aid surges in a range of post‐stabilization countries in Sub‐Saharan Africa.

Date: 2009
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