Riding the Wave: Monetary Responses to Aid Surges in Low-Income Countries

Edward Buffie, Christopher Adam (), Stephen O'Connell () and Catherine Patillo

No 2006-04, CSAE Working Paper Series from Centre for the Study of African Economies, University of Oxford

Abstract: We focus on the management of highly persistent shocks to aid flows, including HIPC or MDG-related increases in net flows, in the presence of currency substitution by the domestic private sector. Such shocks have beneficent long-run effects, but when currency substitution is high they can produce dramatic macroeconomic management problems in the short run. What is the appropriate mix of money and exchange rate targeting in such cases, and the role of temporary sterilization? We analyze these and related issues in an intertemporal optimizing model that allows a portion of aid to be devoted to reducing the government’s seigniorage requirement. Our results argue that a managed float, with little or no sterilization of increases in the monetary base, is the most attractive approach.

Keywords: Aid; Sterilization; Currency Substitution; Seigniorage; Africa (search for similar items in EconPapers)
JEL-codes: C61 F41 O12 O23 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (1)

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Journal Article: Riding the wave: Monetary responses to aid surges in low-income countries (2008)
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