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

Author/Editor:

Andrew Berg ; Luis-Felipe Zanna ; Rafael A Portillo

Publication Date:

January 30, 2014

Electronic Access:

Free Full text (PDF file size is 541 KB).Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 14/18

Subject:

English

Publication Date:

January 30, 2014

ISBN/ISSN:

9781484397008/1018-5941

Stock No:

WPIEA2014018

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

41

Please address any questions about this title to publications@imf.org