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Fiscal inertia, donor credibility, and the monetary management of aid surges

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

Journal of Development Economics, 2010, vol. 93, issue 2, 287-298

Abstract: Donors cannot pre-commit to support scaled-up public spending programs on a continuing basis, nor can governments credibly commit to curtail expenditure rapidly in the event that aid revenues contract. An aid boom may therefore be accompanied by a credibility problem. When this is the case, the absorb-and-spend strategy recommended by the IMF leads to capital flight, higher inflation, and large current account surpluses inclusive of aid. The right policy package combines a critical minimum degree of fiscal restraint with reverse sterilization.

Keywords: Aid; Credibility; Currency; substitution; Pooling; Capital; flows (search for similar items in EconPapers)
Date: 2010
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