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Aid volatility, monetary policy rules and the capital account in African economies

Christopher Adam (), Stephen O'Connell () and Edward Buffie
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Edward Buffie: Indiana University

No 37, WEF Working Papers from ESRC World Economy and Finance Research Programme, Birkbeck, University of London

Abstract: We examine the properties of simple quantity-based monetary policy rules of the kind widely used in low-income African economies. Using a DSGE model and focusing our attention on responses to positive aid shocks, we suggest that policy rules involving substantial reserve accumulation in the face of aid surges serve to ease macroeconomic adjustment to shocks, particularly when a portion of aid is used to support fiscal adjustment. These rules are robust to assumptions about the degree of integration of the domestic public debt market with world capital markets. Although an open capital account facilitates smoother adjustment to temporary aid surges when an aid inflow is fully spent, it exacerbates the adjustment problem when aid is accompanied by fiscal adjustment and hence reinforces the case for a managed float in such circumstances.

Keywords: Monetary policy; Africa; Aid volatility; foreign capital flows; stochastic simulation models (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-afr, nep-dev, nep-dge, nep-mac, nep-mon and nep-opm
Date: 2008-06
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Chapter: Aid Volatility, Monetary Policy Rules and the Capital Account in African Economies (2009) Downloads
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