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Monetary Policy Rules for Managing Aid Surges in Africa

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.
Publisher:
UNU-WIDER
Series:
WIDER Research Paper
Volume:
2008/77
Title:
Monetary Policy Rules for Managing Aid Surges in Africa
Authors:
Christopher Adam, Edward Buffie, Stephen O’Connell, and Catherine Pattillo
Publication date:
September 2008
ISSN Web:
1810-2611
ISBN 13 Print:
9789292301316
Copyright holder:
© UNU-WIDER
Copyright year:
2008
Keywords:
monetary policy, currency substitution, aid, Africa, DSGE models
JEL:
O23, E52, F31, F35
Project:
Conference on 'Aid: Principles, Policies and Performance'
Sponsor:
UNU-WIDER gratefully acknowledges the financial contribution to the conference by the Finnish Ministry for Foreign Affairs.
Format:
online
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