Monetary Policy Rules For Manging Aid Surges In Africa

Christopher Adam (), Stephen O’Connell and Edward Buffie
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Stephen O’Connell: Swarthmore College
Edward Buffie: Indiana University
Authors registered in the RePEc Author Service: Stephen A. O'Connell ()

No 16, WEF Working Papers from ESRC World Economy and Finance Research Programme, Birkbeck, University of London

Abstract: We examine 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, we show 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.

Keywords: Basle Committee; capital adequacy; financial governance; financial architecture; financial reform; international standards; capital flows; poor countries; cost of capital; international development (search for similar items in EconPapers)
Date: 2007-02
New Economics Papers: this item is included in nep-afr, nep-cba, nep-dge, nep-mac and nep-mon
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Working Paper: Monetary Policy Rules for Managing Aid Surges in Africa (2008)
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