Policy Responses to Aid Surges in Countries with Limited International Capital Mobility: The Role of the Exchange Rate Regime

Andrew Berg (), Rafael Portillo and Luis-Felipe Zanna

World Development, 2015, vol. 69, issue C, 116-129

Abstract: 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.

Keywords: Africa; aid; exchange rate regimes; reserve accumulation policies; sterilization policies; transfer problem (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (9)

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Working Paper: Policy Responses to Aid Surges in Countries with Limited International Capital Mobility: The Role of the Exchange Rate Regime (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:wdevel:v:69:y:2015:i:c:p:116-129

DOI: 10.1016/j.worlddev.2013.12.017

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