Policy Responses to Aid Surges in Countries with Limited International Capital Mobility: The Role of the Exchange Rate Regime
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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. 2014/018
Subject:
Central banks Conventional peg Exchange rate arrangements Exchange rate flexibility Foreign exchange Reserves accumulation Sterilization
English
Publication Date:
January 30, 2014
ISBN/ISSN:
9781484397008/1018-5941
Stock No:
WPIEA2014018
Pages:
41
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