## _wp07180 ## Source details **Canonical URL:** [_wp07180](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07180.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07180.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07180.pdf.json) --- ### Introduction and motivation - Since the turn of the century, aid flows to the continent have, on average, increased in volume and become more volatile. - Aid inflows have been increasingly targeted to general budget support and program assistance rather than to project financing, so a larger proportion of aid passes through the government budget and reinforces the link between aid and domestic credit creation. - Policymakers, particularly in post-stabilization countries with recently controlled inflation, are preoccupied with deploying monetary instruments without yielding on inflation gains. - Concern: short-run management of volatile aid inflows can overshadow medium-term developmental rationale for aid, possibly prompting countries to reduce reliance on aid even when medium-term returns remain high. ### Central bankers’ core concerns - Dutch Disease: prevent temporary (or persistent) appreciation of the real exchange rate to avoid perceived competitiveness loss. - Fiscal destabilization: volatile aid may induce public spending difficult to retrench when aid recedes, raising risk of domestic deficit financing and jeopardizing inflation control. - Trade-off between exchange rate volatility and high/volatile interest rates: large aid inflows may force choices between exchange rate volatility and high/volatile interest rates that harm private investment and raise quasi-fiscal burdens. - Policymakers seek monetary rules guiding: nominal exchange rate management, foreign reserves as buffer, sterilization via bond sales. ### Monetary rules analyzed - Reserve buffer plus float: - Accumulate aid inflows as official foreign exchange reserves initially. - Sterilize the full domestic-currency counterpart of aid-financed non-import spending through foreign exchange sales as it occurs. - When aid is the only source of budget volatility and there is no recourse to bond financing, this rule is tantamount to targeting base money. - Exchange rate crawl: - Intervene to keep nominal exchange rate close to long-run equilibrium depreciation. - Does not directly target liquidity growth; responds to latent pressures via private capital account. - Operational distinction: - Crawl: central bank targets nominal exchange rate without reference to government spending and liquidity creation. - Buffer-plus-float: central bank sets time-varying reserve target tied to unspent aid and allows the exchange rate to float once reserve target satisfied. ### Fiscal response types and implications - Deficit-reducing aid: aid substitutes for domestic deficit financing and reduces present value of expected future seigniorage (e.g., retire domestic debt or reduce domestic credit requirement). - Expenditure smoothing: smooth government expenditure relative to aid, altering timing of seigniorage without necessarily reducing its present value. - Policy implication: in countries still bringing inflation under control, using some portion of aid to reduce present value of domestic financing requirement likely has particularly high return. ### Model framework and calibration (key parameters preserved) - Model: stochastic simulation, simple optimizing two-sector dependent economy with currency substitution; private sector holds domestic and foreign currency and indexed government bonds. - Capital and external access: private sector and public sector have no direct access to world capital markets; domestic government debt non-tradable. - Shocks: stochastic net aid inflow is the sole external volatility source; aid shocks scaled to an equivalent of 2 percent of GDP and follow AR(1) with autoregressive parameter 0.50. - Fiscal smoothing and deficit parameters: - δ (fraction of aid for deficit reduction) assumed 0 or 0.25 in simulations; baseline 0.25. - μ (fraction of aid account carried forward) chosen μ = 0.5 in simulations. - For AR(1) parameter 0.50: Half-life of aid shock = one year; 94 percent of aid received within four years. With μ = 0.5, half-life of aid-induced spending doubles; 81 percent spent within four years. If μ = 0.25, half-life of spending ≈ almost four years; only 56 percent spent by year four. - Money-demand and preference calibration: - σ = 2 and τ = 0.50 (mid-range values). - These imply steady-state inflation elasticities of demand for money of 0.53 for mature stabilizers and 0.62 for high-inflation, low-credibility countries. - Alternative robustness set: σ = 0.75 and τ = 0.25. - Archetype economies: - Pre-stabilization: steady-state inflation = 25 percent per annum; steady-state debt = 20 percent of GDP. - Mature stabilizers: steady-state inflation = 10 percent per annum; steady-state debt = 9 percent of GDP. - Empirical stylized fact: Average propensity to spend out of aid across SSA ≈ 75 cents on the dollar. ### Main simulation findings — All aid spent - When fiscal authorities spend all aid as received (no deficit reduction, μδ = 0): - Domestic financing is fully insulated; buffer-plus-float and pure float operationally equivalent. - Initial real exchange rate appreciation: "just over 2 percent over the first three years" in response to a 2 percent of GDP aid inflow. - Under crawl vs float: crawl yields marginally less volatility for inflation and real exchange rate; differences are second-order, especially for post-stabilization countries. - Pre-stabilization calibration magnifies IRFs and volatilities because of higher inflation elasticity of money demand. - Overall: effects modest; macro outcomes largely benign when aid fully spent. ### Main simulation findings — Aid partially spent / deficit reduction or smoothing - When aid is not fully spent (partial deficit reduction δ > 0 or fiscal smoothing μ > 0): - Pure float with some deficit reduction: - Produces first-order decline in seigniorage and a monetary contraction at the outset of an aid boom. - Example (post-stabilization): nominal exchange rate appreciates by around 14 percent on impact; real rate appreciates by 6.5 percent on impact; non-tradable output contracts by 1.6 percent on impact (vs increase of around 0.8 percent when no deficit reduction); prices fall sharply (10 percent fall under pure float in example). - Mechanism: reduced expected inflation induces portfolio substitution into domestic currency, private capital inflows, nominal appreciation overshooting → non-tradable price fall under price stickiness. - Crawl and buffer-plus-float: - Both substantially reduce disruptive volatility relative to pure float. - Examples: under buffer-plus-float prices fall by 4 percent; under crawl virtually no price fall (versus 10 percent under pure float in example). - Real exchange rate appreciation pegged back to around 1.5 percent under crawl and 3.3 percent under buffer-plus-float (vs 6.5 percent under pure float). - Crawl generally delivers smoother adjustment and lower volatility, especially in pre-stabilization calibrations (higher inflation elasticity of money demand). - Buffer-plus-float stabilizes seigniorage w.r.t. the unspent portion of aid but may under-accommodate increases in domestic money demand when expected inflation falls. - Fiscal smoothing (μ = 0.5): - Volatility of total spending is reduced regardless of monetary response. - Fiscal smoothing removes insulation of domestic liquidity afforded by pure float when aid fully spent: under float, inflation and exchange rate volatility increase relative to no fiscal smoothing; under crawl, volatility marginally reduced. - When some aid used for deficit reduction, aggressive crawl remains most effective at minimizing macro volatility even with fiscal smoothing. - Warning: if monetary authorities ignore fiscal actions and maintain a float with respect to the entire aid inflow (i.e., attempt to unwind fiscal reserve accumulation), outcome can be highly unstable—over-absorption by public sector and accentuated nominal appreciation with recessionary risk in nontraded sector. ### Bond sterilization and mixed sterilization - Mixed [50:50] foreign-exchange and bond sterilization results: - Compared with crawl or buffer-plus-float, bond sterilization performs relatively poorly. - When aid fully spent, bond sterilization contributes to steady depreciation in nominal exchange rate and persistent domestic inflation. - When aid partly used for deficit reduction, bond sterilization delivers higher real interest rates relative to alternatives due to quasi-fiscal effects: domestic debt is a state variable; domestic interest costs rise sharply beyond first period, reversing expected disinflation. - Memo example (All Aid Spent with [50:50] rule, horizons 0,1,2,3,4,5,15; Stdev): - In: 12.805 4.624 4.195 3.795 3.501 3.275 1.933 18.357 - NER: 15.227 3.014 3.631 3.555 3.394 3.230 1.939 19.639 - RER: 4.404 1.477 0.451 0.015 -0.179 -0.262 -0.209 4.792 - dz: 25.000 11.250 4.438 1.091 -0.526 -1.281 -1.286 28.531 - db: 11.111 5.000 1.972 0.485 -0.234 -0.569 -6.898 12.681 - Policy caution: focusing narrowly on nominal liquidity growth may prompt bond sterilization at exactly the wrong time—when a liquidity injection rather than a withdrawal is required. ### Real exchange rate targeting - Targeting real exchange rate at initial steady-state: - When aid fully spent: aggressive real exchange rate targeting creates much higher inflation than float or nominal exchange rate target because authorities accumulate reserves and enforce nominal depreciation to neutralize non-traded price increases; aggregate inflation rises. - When aid partly spent: real exchange rate targeting can prevent severe short-run real appreciation associated with pure float and shares advantages of crawl and buffer-plus-float, but reserve accumulation and inflation are substantial. - Conclusion: substantial real benefits (not modelled) would be required to justify aggressive real exchange rate targeting; fiscal instruments may be first-best for influencing competitiveness. ### Robustness and broader relevance - Both reserve buffer plus float and exchange rate crawl are robust to plausible variations in fiscal response to aid. - Distinct prescriptions by country type: - For pre-stabilization countries (where fiscal response to aid often reduces domestic deficit financing substantially), reserve-plus-buffer may be inefficiently tight; managed float with little/no sterilization better accommodates increased money demand as inflation declines. - For mature stabilizers, reserve-buffer strategies and crawls are especially effective at moderating short-run macro volatility. - Analysis parallels management of commodity price volatility in natural-resource economies where fiscal links to budget create similar transmission channels. ### Key numerical and calibration highlights (preserved exactly) - Average propensity to spend out of aid across SSA ≈ 75 cents on the dollar. - Aid shock scaling: 2 percent of GDP; AR(1) with autoregressive parameter 0.50. - Preferences/calibration: σ = 2 and τ = 0.50 (steady-state inflation elasticities: 0.53 for mature stabilizers; 0.62 for high-inflation countries). - Alternative parameter set: σ = 0.75 and τ = 0.25 (used in robustness checks). - Pre-stabilization steady-state inflation: 25 percent per annum; steady-state debt: 20 percent of GDP. - Mature stabilizers steady-state inflation: 10 percent per annum; steady-state debt: 9 percent of GDP. - Fiscal-smoothing parameter used in simulations: μ = 0.5. - Representative quantitative illustrative outcomes: - Real appreciation "just over 2 percent over the first three years" when all aid spent. - Pure float with partial deficit reduction (post-stabilization example): nominal exchange rate appreciates around 14 percent on impact; real rate appreciates 6.5 percent on impact; non-tradable output contracts 1.6 percent on impact; prices fall 10 percent in comparison. - Buffer-plus-float example: prices fall 4 percent (vs 10 percent pure float); real appreciation ~3.3 percent (vs 6.5 percent pure float). - Crawl example: real appreciation ~1.5 percent in same comparison; virtually no price fall in example. ### Policy recommendations (summary) - Aim to align path of domestic deficit financing with demand for domestic base money; account for private sector portfolio behavior. - When aid is fully spent and credible: - Domestic financing perturbed little; macro adjustment smooth; choice of nominal anchor less critical. - When aid partly used for deficit reduction or smoothed: - Prefer nominal exchange rate crawl or reserve buffer plus float to reduce overshooting real appreciation and inflation volatility. - Crawl is decisively superior in pre-stabilization settings with high inflation elasticity of money demand. - Avoid heavy reliance on bond sterilization unless fiscal control is weak or FX markets are extremely shallow/distorted. - If donor/government credibility is low, pair near-term fiscal restraint (temporary reserve accumulation or domestic debt buyback) with monetary measures until aid scaling-up perceived as permanent. *Source: _wp07180 - Sections 1–5 excerpts (Mean Share of Aid Spent; Model structure, stylized facts, policy rules; simulation results and tables).* ### 1. Mean Share of Aid Spent by Country Group......................................................................29 ### 1. Mean Share of Aid Spent by Country Group......................................................................29 ### Introduction and motivation - Since the turn of the century, aid flows to the continent have, on average, increased in volume and become more volatile. - Aid inflows have increasingly been targeted to general budget support and program assistance rather than to project financing, so a larger proportion of aid passes through the government budget and reinforces the link between aid and domestic credit creation. - Policymakers, particularly in post-stabilization countries where inflation has only recently been brought under control, are preoccupied with deploying available monetary instruments without yielding on hard-won inflation gains. - Concerns exist that short-run management of volatile aid inflows can overshadow medium-term developmental rationale for aid, possibly leading countries to reduce reliance on aid even when medium-term returns remain high. ### Central bankers’ core concerns - Three main areas of concern: - Dutch Disease: attempts to prevent temporary (or persistent) appreciation of the real exchange rate to avoid perceived losses in competitiveness. - Fiscal destabilization: volatile aid may induce public spending difficult to retrench when aid recedes, increasing the risk of falling back on domestic deficit financing and jeopardizing inflation control. - Trade-off between exchange rate volatility and high/volatile interest rates: large aid inflows may force authorities to choose between nominal/real exchange rate volatility and high/volatile interest rates that raise concerns about private investment, banking lending behaviour, and the quasi-fiscal burden of increased domestic borrowing. - Policymakers seek monetary rules to guide responses, including questions about managing the nominal exchange rate, the role of foreign reserves as a buffer, and sterilization through bond sales. ### Monetary rules analyzed - The analysis casts the problem as how volatility of aid flows transmits into volatility in the path of expected future seigniorage. - Two specific rules considered: - Reserve buffer plus float: - Directly stabilizes the path of seigniorage by synchronizing foreign exchange sales to the growth in liquidity generated by domestic spending out of aid. - Initially accumulates aid inflows as official foreign exchange reserves, then sterilizes the full domestic currency counterpart of aid-financed non-import spending through foreign exchange sales as it occurs. - When aid is the only source of volatility on the budget and there is no recourse to bond financing, this rule is tantamount to targeting base money. - Exchange rate crawl: - Authorities intervene in the foreign exchange market to keep the nominal exchange rate close to its long-run equilibrium rate of depreciation. - Does not target liquidity growth directly but responds to latent pressures via the private capital account reflecting changes in demand for and supply of domestic liquidity. - Operational distinction: - Under a crawl, the central bank targets the nominal exchange rate without reference to government spending and liquidity creation. - Under buffer plus float, the central bank sets a time-varying reserve target corresponding to aid financing not yet spent and allows the exchange rate to float freely once this reserve target is satisfied. ### Fiscal response distinctions and implications - Two types of fiscal responses to aid surges: - Deficit-reducing aid: aid substitutes for domestic deficit financing and reduces the present value of expected future seigniorage (e.g., retiring domestic debt or reducing domestic credit requirement). - Expenditure smoothing: authorities smooth the profile of government expenditure relative to aid, altering timing of seigniorage without necessarily reducing its present value. - Among countries still struggling to bring inflation under control, using some portion of aid to reduce the present value of the government’s domestic financing requirement is likely to have particularly high return. ### Model framework and calibration - A stochastic simulation model is used to illustrate arguments. - Key features: - Characterization of households’ portfolio choices and government financing options reflects ‘imperfectly open’ capital account structures pervasive in much of Sub-Saharan Africa. - Private sector engages in currency substitution but neither it nor the public sector has direct access to world capital markets. - Domestic government debt is effectively non-tradable; domestic interest rates are not tied down by interest parity conditions. - Model calibrated to reflect structural features of low-income African economies, both pre- and post-stabilization (post-stabilization countries—referred to as mature stabilizers—have established track records of fiscal discipline and low inflation over a sustained period; examples include Tanzania and Uganda since the mid-1990s). ### Main simulation findings and policy implications - Simple monetary rules that stabilize the path of expected future seigniorage for a given aid flow have attractive properties relative to alternatives such as heavy bond sterilization or pure exchange rate float. - Strategies involving active foreign exchange intervention and reserve buffering designed to smooth the path of domestic deficit financing best moderate short-run macroeconomic volatility, including avoiding excessive real exchange rate volatility. - Robustness: - Both the reserve buffer plus float and the exchange rate crawl are robust to plausible variations in the fiscal response to aid. - Distinct policy recommendations by country type: - For pre-stabilization countries, where the fiscal response to aid typically involves a substantial reduction in domestic deficit financing requirements, the reserve plus buffer strategy may be inefficiently tight. - For these pre-stabilization cases, a managed float with little or no sterilization of increases in the monetary base better accommodates the increased demand for money associated with declining inflation and delivers a more attractive way of smoothing macroeconomic volatility. ### Broader relevance - The analysis and insights for managing aid volatility have close parallels with managing commodity price volatility, especially in natural-resource economies where fiscal linkages via the budget create similar transmission channels from external price volatility to the domestic economy. *Source: _wp07180 - 1. Mean Share of Aid Spent by Country Group......................................................................29* ### Section 3 then describes the structure of the model (although readers interested only in the ### _wp07180 - Sections 2–4 excerpt: Model structure, stylized facts, and policy rules ### Basic structure and stylized facts - Consolidated public sector budget constraint (nominal): Fiscal Deficit – Net Budgetary Aid = ΔM + ΔB − ΔNIR (equation (1) description). - Balance of payments identity: CA Deficit – Net Aid = −ΔNFA (equation (2) description). - In import numeraire (normalizing world price of imports to 1 and dividing by exchange rate Et): - (3) tttttt adzbptm−=Δ−Δ++Δ (m = real monetary base, b = indexed government bonds, z = net international reserves, a = net budgetary aid, d and c = fiscal and current account deficits before aid) - (4) tttt zafcΔ−=Δ+ . - Key interpretation: - Right-hand side of (3) determines total change in public sector liabilities (domestic financing requirement); fiscal choice is how much of temporary aid inflow to spend each period. - Monetary policy controls composition of left-hand side of (1): instruments zΔ (foreign exchange intervention) and bΔ (open-market operations) determine path of mtΔ given private money demand. - Starting steady state: fiscal deficit financed by combination of aid and inflation tax; current account deficit fully financed by aid. - Seigniorage path from deviations (equation (5)): .) ]([)( tttttt bpaazddttmΔ−−−Δ−−=−+Δ - Instantaneous effect of non-self-sterilizing aid: 0(=−ddt and aaztt−=Δ in (5)) implying domestic liquidity initially unchanged; subsequent government spending (ddt−) and central bank actions (zΔ, bΔ) shape macro response. - Empirical stylized facts from SSA (Tables 1 and 2, summarized in text): - Average propensity to spend out of aid across SSA ≈ 75 cents on the dollar. - Distinction between pre-stabilization and post-stabilization countries: - Pre-stabilization (e.g., Malawi, Democratic Republic of Congo until recently, Uganda until early 1990s): markedly lower propensity to spend out of aid—portion used to support inflation reduction. - Post-stabilization (e.g., Tanzania, Uganda since early 1990s): higher propensity to spend; no intrinsic need to reduce seigniorage. - Aid flows and surges tend to be met by substantial official reserve accumulation, especially among mature stabilizers. ### The simulation model — design and closure - Model type: simple optimizing two-sector dependent economy with currency substitution (both domestic and foreign currencies deliver liquidity services). - Private agent: consumes traded imports and non-traded final goods; accumulates domestic currency, foreign currency (non-interest-bearing), and government bonds (indexed to consumer prices). No access to foreign bonds; private capital account open to accumulate/decumulate foreign currency via central bank or current account. - Supply side: - Two representations: fully flexible prices/wages (full employment) and sticky non-traded goods prices (output of non-traded goods demand-determined). Simulations focus entirely on the sticky-price (second) case. - Aggregate capital stock fixed; no investment. - Low elasticity of substitution in production implies shocks to sectoral supplies/demands strongly affect real exchange rate. - Policy rules: - Fiscal policy: linear rule for government spending response to aid (spending response determines domestic financing path). - Monetary policy: two independent rules for transactions in foreign exchange (reserves) and government securities. - Shocks: stochastic net aid inflow is the sole external volatility source in this paper. ### Preferences and aggregate demand (key functional forms and first-order conditions) - Representative household expected utility: - ∑∞ s=0 β^s [(C_{t+s}^{1−1/τ}/(1−1/τ)) − h L_{t+s}^{1−1/τ}/(1−1/τ)] (structure described; τ = inter-temporal elasticity of substitution, β = (1+ρ)^{−1}). - Consumption and liquidity aggregates are CES: - C and L defined as CES over non-traded and imported goods and over domestic and foreign currency holdings (parameters σ, αk, k). - Financial wealth in period t: W_t = P_t b_t + M_t + E_t f_t. - Nominal household budget constraint (in importables units, lower-case variables) summarized to obtain: - (7) 111 . 11 ttt tItttttttt tt iix wrwmf ytrpC xx −−− − Δ = − − + − − ++ (as presented in source) - First-order conditions include: - Consumption Euler equation (8): (full form as given in source). - Currency demand conditions (9) and (10) (full forms as given in source). - Linearized relative currency demand (log-deviations): - 01 (), t itt x t tt t m iix f φ φ φ + = −⋅ + ⋅ − % % - Definitions: φ_i = /0 i i φ σ => ; φ_x = .0)/(>−= xi x σ φ (preserve original notation) - Demand for domestic currency (log-linear): - 01 loglog() log, tt itxttttt MPiixC η η η + − = − ⋅ + ⋅ − + % %% (as presented) - Semi-elasticities and steady-state inflation elasticity of money demand: - steady-state inflation elasticity ε_π = [(1)( )](/). i v i η τ σ τ π = ⋅ = + − − (equation (11) representation) - Parameter calibration choices reported: - σ = 2 and τ = 0.50 (mid-range values) - These imply steady state inflation elasticities of the demand for money of 0.53 for mature stabilizers and 0.62 for high-inflation, low-credibility countries (see Table 3a referenced). - Alternative parameter set used in robustness checks (available on request): σ = 0.75 and τ = 0.25. ### Aggregate supply and price rigidity - Output aggregator (constant elasticity of transformation across exportable and non-tradable production): - (12) /(1) (1) /(1) (1) NX Q Q Q η η η η δ δ + + [ ] = + − (as in source). - Full-employment GDP in importables (equation (13) form, variables defined: X_p, p_o, ω_N, ω_X). - Non-traded goods pricing: Calvo (1983) pricing with parameter λ; optimal price linked to output gap: - Aggregate price level dynamics and firm-level optimal price described in text (parameters λ, Γ, ζ, φ). - Sector-specific Phillips Curve: - (14) ,1,1 (, )( ) loglog[loglog], () NtttNtNtNXt NtN ttN tNt NtNXt CeC GQe PP EP P Qe φ ψ φ −+ + − − = Γ − + ⋅ (as given) - ψ measures price flexibility; as ψ → ∞ equation (14) approaches flexible-price market-clearing. ### The public sector and consolidated constraints - Central bank balance sheet (nominal): C_t M_t = z_t + P_t C b_t Δ (as presented). - Government budget constraint (nominal) and consolidated public sector constraint given; in importables: - (3’) , 1 1 x P t mpb zdam t tttt x t Δ + Δ − Δ = − − − + (re-statement of equation (3) in importables) - Fiscal deficit defined as d_t ≡ g_t − p_t r b_t − etc. (as in source: 11 . P t ttttt dgtprb −− ≡ − +) - Current account identity (importable terms): - (4’) . ttttttt fzygpCaΔ+Δ= − − + (as in source) ### External shocks characterization - Aid shock process: - ν_t ≡ log a_t − log ā follows stationary AR(1): - (15) 2 11 , . tttttta ννν α ε ε ε σ − ′ = + = (as given) - In the paper: aid shocks scaled to an equivalent of 2 percent of GDP and follow AR(1) with autoregressive parameter 0.50. - ε_t is serially uncorrelated; root of lag polynomial stable. - Parameterization based on a cross-country VAR analysis (O’Connell et al (2007) referenced). ### Fiscal policy rule and aid smoothing - Fiscal structure: lump-sum taxes held constant; government spending = transfers to private sector. Aid shocks are only revenue volatility source. - Two fiscal decisions: - δ fraction of aid devoted to deficit reduction (substitute for domestic deficit financing); amount (1−δ) spent. - Spending smoothing via an aid account W: government spends fraction (1−μ) of W each period; fraction μ smooths to future periods. - Fiscal deficit in period t: - (16) [] 1 (1) (1) () ttt ddaaW μ δ − − = − − − + (as given) - Aid account motion: - W_{t} evolves per equation in text: 11 (1) () ( ) [ (1) ()] tttttt WWaa ddaa W δ μ δ − − = + − − − − = − − + (as presented) - Calibration choices and implications: - δ assumed 0 or 0.25 (based on Table 1 evidence). - μ chosen in simulations: μ = 0.5 (fixed). - For aid AR(1) parameter 0.50: - Half-life of aid shock = one year; 94 percent of aid received within four years. - With μ = 0.5, half-life of aid-induced spending doubles; only 81 percent of aid spent within four years. - If μ = 0.25, half-life of spending ≈ almost four years; only 56 percent spent by year four. ### Monetary policy: reserve management and intervention rules - Monetary instruments: transactions in foreign exchange (reserves z) and government securities (b). - Reserve reaction function (baseline form accommodating a fixed rate of crawl and reserve targets): - Simple reaction: zΔ = α( x_{t} , x_{t−1} ) for 0 ≤ α1 ≤ 1 (reference to literature). - Full specification with long-run reserve target z and possible time-varying reserve target tied to fiscal spending (equation (17)): - (17) , )() ( 3 1 21 z ddaa z z z x xx z z ttttt − ⋅ − − + − − − − = Δ − γ α α α (parameters constrained: 0 ≤ α1 ≤ 1, α2 > 0, α3 ∈ {0,1}, 0 ≤ γ ≤ 1; x is steady-state rate of depreciation; z steady-state reserves) - Interpretations of parameters and regimes: - α1 governs commitment to steady-state rate of crawl: - As α1 → ∞ regime → predetermined crawl with x_t = x continuously. - α1 = 0 → float: central bank intervention independent of nominal exchange rate movements. - Pure float: α1 = 0 and α3 = 0 (central bank ignores exchange rate and keeps reserves unchanged). - Buffer-plus-float policy: α1 = 0, α3 = 1, γ = 1 — central bank sells aid dollars precisely to finance aid-induced spending as it occurs, but floats with respect to other shocks. - Reserve policy can include direct linkage of foreign exchange sales to path of aid-induced government spending via α3 and γ. *Source: Excerpt from _wp07180 (Sections 2–4) — simulation model, stylized facts, and fiscal/monetary policy rules.* ### 5.4 we do this by replacing the exchange rate term ### _wp07180 - 5.4 we do this by replacing the exchange rate term ### Monetary policy frameworks and mechanisms - Exchange rate term replaced by ()t ee− where e denotes the real exchange rate. - Import component of aid-induced spending (zero in the model runs) is self-sterilizing: it generates no increase in the monetary base because government deposits decline (and net domestic credit rises) as reserves decline. - Buffer plus float vs. pure float: - If 0==μδ so that aid is always spent immediately, buffer plus float and pure float are operationally equivalent. - With deficit-reduction or expenditure-smoothing components, buffer plus float can involve substantial reserve accumulation during an aid boom. - Consolidated budget constraint (equation (5)): - (5) .)]([)( tttttt bpaazddttmΔ−−−Δ+−=−+Δ - Setting .0=Δb for initial discussion. - Bond operations reaction function (general form): - )()( 1321 bbztadbp tttttt −−Δ+−−=Δ − βββ - If 1>0,β allows for gradual return of bond holdings to a long-run level. - When ,1 21 == ββ the impact of bond operations is to stabilize seigniorage over time at the steady-state inflation tax. - Bond and foreign-exchange split (generalized): - (18) .)()]([))(1( 1321 bbaazddbp tttttt −−−−Δ+−−=Δ − ββγβ - In simulations the authors examine the specific case where 0.50 γ =. - Adjustment (unwinding) rates set in simulations: - setting 05.0 32 == βα throughout. ### Model calibration and simulation design - Two archetype economies: "pre-stabilization" and "mature stabilizers". - Initial (steady state) inflation: 25 percent per annum for pre-stabilization; 10 percent for mature stabilizers. - Initial steady-state debt: 20 percent of GDP for pre-stabilization; 9 percent of GDP for mature stabilizers. - Both economies assumed to face the same pattern of aid shocks. - Fiscal response parameter: - Let δ denote the proportion of the inflow devoted to deficit-reduction; public spending adjusts by (1)δ− of the aid shock. - Based on evidence, authors assume 0.25δ=. - Aid shocks in simulations: - Simulated IRFs respond to a positive shock to aid of 2 percent of GDP, around its steady state mean value of 10 percent of GDP. - Simulation tools: - Dynare-Matlab routines (Julliard 1996) using a first-order Taylor approximation around the non-stochastic steady state. ### Results: All aid is spent - When fiscal authorities spend all aid as received: - Domestic financing is fully insulated; no practical distinction between pure float and buffer plus float. - Differences arise in how initial real exchange rate appreciation is effected: - Under crawl: initial inflationary spike required. - Under float: initial adjustment is mildly deflationary as nominal exchange rate appreciates. - Quantitative example: real appreciation is "just over 2 percent over the first three years" in response to a 2 percent of GDP aid inflow. - Overall: effects are modest and macroeconomic outcomes largely benign; crawl delivers marginally less volatility for inflation and real exchange rate but differences are second-order, especially for post-stabilization countries. - Pre-stabilization calibration magnifies IRFs and volatilities due to higher inflation elasticity of money demand. ### Results: Aid not fully spent (partial deficit reduction / smoothing) - Partial spending removes insulation of domestic financing and exposes monetary authorities to altered path of domestic financing. - Pure float (no intervention, 0zΔ=) when aid partly used for deficit reduction: - Produces a first-order decline in seigniorage and a monetary contraction at the outset of an aid boom. - Simulation outcomes (post-stabilization example): - Nominal exchange rate appreciates by around 14 percent on impact. - Real rate appreciates by 6.5 percent on impact. - Non-tradable output contracts by 1.6 percent on impact (vs. increase of around 0.8 percent when no deficit reduction). - Prices fall sharply (10 percent fall under pure float in an example comparison). - Mechanism: reduced expected inflation induces portfolio substitution into domestic currency, causing private capital inflows and nominal exchange rate pressure; overshooting appreciation forces non-tradable prices down if price stickiness present. - Crawl and buffer plus float performance: - Both substantially reduce disruptive volatility relative to pure float. - Examples: - Under buffer plus float prices fall by 4 percent; under crawl virtually no price fall (compared to 10 percent under pure float). - Real exchange rate appreciation pegged back to around 1.5 percent under crawl and 3.3 percent under buffer plus float (vs. 6.5 percent under pure float). - Crawl generally delivers smoother adjustment and lower volatility, especially in pre-stabilization calibrations where inflation elasticity of money demand is higher. - Buffer plus float stabilizes seigniorage with respect to the unspent portion of aid but maintains a free float with respect to the spent portion; hence it may under-accommodate increases in domestic money demand when expected inflation falls. ### Bond sterilization - Mixed sterilization rule (50:50 split between forex sales and bond sales) examined (Table 6). - Key findings: - Compared with crawl or buffer plus float, bond sterilization performs relatively poorly. - When aid fully spent, bond sterilization contributes to steady depreciation in nominal exchange rate and persistent domestic inflation. - When aid partly used for deficit reduction, bond sterilization delivers higher real interest rates relative to alternatives due to quasi-fiscal effects: - Domestic debt is a state variable; domestic interest costs rise sharply beyond the first period, reversing expected disinflation. - Authors warn that focusing narrowly on nominal liquidity growth may prompt bond sterilization at exactly the wrong time—when a liquidity injection rather than a withdrawal is required. ### Real exchange rate targeting - Targeting real exchange rate at initial steady-state level (Table 7) yields: - When aid fully spent: - Aggressive real exchange rate targeting creates much higher inflation than float or nominal exchange rate target. - Mechanism: authorities accumulate reserves and enforce nominal depreciation to neutralize non-traded price increases; with non-tradable price inflation and nominal depreciation moving in same direction, aggregate inflation rises. - Conclusion: substantial real benefits (not modelled) would be required to justify this approach; fiscal instruments may be first-best for influencing competitiveness. - When aid partly spent: - Real exchange rate targeting can prevent severe short-run real appreciation associated with pure float and inherits much of the advantages of crawl and buffer plus float. - Reserve-accumulation is substantial and inflation higher than pure float—but since disinflation under pure float caused volatility, real targeting can be a substantial improvement in this context. - General caution: - Using bond operations to maintain money anchor during intervention would produce high real interest rates and mounting interest burden, offering few inflation gains. ### Smoothing public expenditure (‘aid account’ smoothing) - Fiscal smoothing rule applied with 0.5μ= (approximately doubles half-life of expenditure response). - Simulation setup: post-stabilization calibration focus. - Key features from Table 8: - Volatility of total spending is reduced regardless of monetary response. - Fiscal smoothing removes previous insulation of domestic liquidity afforded by pure float when aid fully spent: - Under float, inflation and exchange rate volatility increase relative to no fiscal smoothing. - Under crawl, volatility marginally reduced relative to no fiscal smoothing. - When some aid used for deficit reduction, aggressive crawl remains most effective at minimizing macroeconomic volatility even with fiscal smoothing. - Warning: if monetary authorities ignore fiscal actions and maintain a float with respect to entire aid inflow (acting to unwind fiscal reserve accumulation), outcome is highly unstable—over-absorption by public sector and accentuated nominal appreciation with recessionary risk in nontraded sector. ### Conclusions and policy implications - Central challenge: align path of domestic deficit financing with demand for domestic base money; private sector portfolio behavior is central. - When aid fully spent: - Domestic financing perturbed little; macroeconomic adjustment smooth; choice of nominal anchor matters little. - Aid surge facilitates higher private consumption and modest appreciation of real and nominal exchange rates. - When aid partly used for deficit reduction: - Portfolio adjustments can cause overshooting real appreciation, increased inflation volatility, and recessionary pressures in nontraded sector. - Realignment of absorption with spending via crawl or buffer plus float significantly reduces volatility. - For pre-stabilization settings with higher inflation elasticity of money demand, crawl is decisively superior in reducing nominal and real volatility. - Bond sterilization generally not central to efficient management of aid surges unless fiscal control is weak or foreign-exchange markets are too shallow/distorted. - Two caveats: - If portfolio effects are weak, distinction between policy rules diminishes; however capital market integration may increase portfolio effects. - Analysis abstracts from donor and government credibility issues; lack of credibility can make full ‘absorb and spend’ destabilizing—some near-term fiscal restraint combined with temporary reserve accumulation or domestic debt buyback may be necessary until aid scaling-up is perceived permanent. *Source: _wp07180 - 5.4 we do this by replacing the exchange rate term* ### 1. Buffer+Float ### 1. Buffer+Float ### Buffer+Float (first block) - In: -1.131 -1.179 -1.258 -1.004 -0.723 -0.494 -0.004 2.491 - NER: -2.436 -1.226 -1.056 -0.720 -0.466 -0.295 -0.002 3.071 - RER: -2.372 -2.458 -2.090 -1.575 -1.107 -0.745 -0.007 4.549 - RIR: -1.571 -1.296 -0.847 -0.528 -0.325 -0.199 -0.001 2.305 - ca: 0.725 0.051 -0.143 -0.170 -0.144 -0.107 -0.001 0.787 - DN: 0.785 0.197 -0.104 -0.184 -0.173 -0.135 -0.002 0.874 - C: 2.306 1.592 1.003 0.618 0.378 0.230 0.001 3.077 - dz: 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 - mg: -0.075 -2.118 -1.704 -1.091 -0.696 -0.406 -0.003 3.084 ### Crawl (first block) - In: 1.089 0.046 -0.311 -0.369 -0.320 -0.246 -0.027 1.324 - NER: 0.245 -0.139 -0.188 -0.158 -0.119 -0.088 -0.026 0.524 - RER: -1.534 -1.870 -1.646 -1.261 -0.897 -0.609 -0.008 3.406 - RIR: -1.371 -1.159 -0.812 -0.531 -0.336 -0.209 -0.001 2.085 - ca: 0.863 0.127 -0.108 -0.154 -0.136 -0.103 -0.002 0.914 - DN: 1.023 0.400 0.088 -0.036 -0.069 -0.066 -0.001 1.109 - C: 2.159 1.536 1.009 0.639 0.398 0.245 0.003 2.949 - dz: -3.338 2.062 2.625 2.088 1.455 0.954 1.410 5.507 - mg: -1.179 -0.281 0.285 0.355 0.289 0.203 -0.002 1.809 ### 4(b): Pre-Stabilization Countries ### 1. Buffer+Float (Pre-Stabilization) - In: -4.475 -5.261 -1.987 -3.170 -0.782 -1.754 -0.152 8.186 - NER: -5.98 -6.077 -0.951 -3.364 -0.062 -1.918 -0.234 9.575 - RER: -2.410 -3.716 -2.059 -2.370 -1.019 -1.281 -0.079 5.742 - RIR: -2.800 0.085 -1.587 0.359 -0.955 0.391 0.113 3.540 - ca: 0.714 0.201 -0.180 -0.118 -0.207 -0.089 0.005 0.821 - DN: 0.781 -0.752 -0.025 -0.713 -0.019 -0.465 -0.053 1.436 - C: 2.322 1.049 1.087 0.366 0.529 0.096 -0.025 2.866 - dz: 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 - mg: -0.820 -10.416 0.231 -5.663 1.354 -3.366 -0.500 12.999 ### 2. Crawl (Pre-Stabilization) - In: 1.103 -0.075 -0.412 -0.458 -0.400 -0.319 -0.057 1.602 - NER: 0.304 -0.311 -0.322 -0.265 -0.205 -0.157 -0.054 1.015 - RER: -1.278 -1.655 -1.512 -1.203 -0.890 -0.631 -0.013 3.106 - RIR: -1.170 -0.947 -0.678 -0.462 -0.309 -0.203 -0.003 1.763 - ca: 1.012 0.229 -0.058 -0.138 -0.139 -0.114 -0.004 1.070 - DN: 0.921 0.351 0.079 -0.029 -0.060 -0.060 -0.002 0.995 - C: 1.887 1.355 0.924 0.616 0.406 0.266 0.005 2.630 - dz: -3.652 3.610 3.860 2.971 2.103 1.429 2.479 7.779 - mg: -2.022 -0.552 0.136 0.295 0.277 0.210 -0.047 2.281 Notes: - [1] An increase in NER and RER denotes a depreciation in the nominal and real exchange rates respectively. - [2] See Tables 3a and 3b for parameter settings. - [3] For float, z1=0; for crawl, z1=15 and z2=0.95. - [4] dr=0.00. - [5] since mu=0, dW=0. ### Table 5. Deficit-Reducing Aid ### Aid Inflow [percent of GDP] (Horizon) - a: 2.000 1.000 0.500 0.250 0.125 0.063 0.001 ### 5(a): Post-Stabilization Countries ### Panel 1: Pure Float (Post-Stabilization) - In: -10.465 -2.983 -2.206 -1.478 -0.956 -0.608 -0.005 11.269 - NER: -14.056 -1.737 -1.479 -0.951 -0.582 -0.352 -0.002 14.290 - RER: -6.529 -4.264 -2.941 -1.984 -1.303 -0.839 0.006 8.733 - RIR: -0.396 -0.960 -0.709 -0.462 -0.291 -0.181 -0.001 1.390 - Ca: 0.759 0.031 -0.155 -0.174 -0.145 -0.107 -0.001 0.821 - DN: -1.591 -0.778 -0.559 -0.405 -0.281 -0.188 -0.002 1.937 - C: 1.494 1.314 0.877 0.555 0.345 0.213 0.001 2.286 - dz: 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 - mg: -7.749 -4.395 -3.191 -1.877 -1.065 -0.603 -0.003 9.733 ### Panel 2: Crawl (Post-Stabilization) - In: -0.016 -0.420 -0.518 -0.467 -0.379 -0.296 -0.098 1.596 - NER: -0.824 -0.518 -0.379 -0.275 -0.207 -0.165 -0.096 1.679 - RER: -1.471 -1.648 -1.394 -1.045 -0.734 -0.496 -0.014 2.984 - RIR: -1.121 -0.878 -0.605 -0.396 -0.251 -0.157 -0.001 1.629 - ca: 1.098 0.322 0.029 -0.063 -0.078 -0.068 -0.004 1.154 - DN: 0.670 0.202 0.000 -0.066 -0.074 -0.062 -0.001 0.713 - C: 1.668 1.158 0.759 0.484 0.304 0.190 0.007 2.256 - dz: 11.243 6.498 4.276 2.655 1.506 0.933 0.643 14.107 - mg: -0.675 -1.210 -0.352 -0.061 0.013 0.011 -0.096 1.899 ### Panel 3: Buffer+ Float (Post-Stabilization) - In: -4.199 -2.128 -2.097 -1.791 -1.488 -1.242 -0.496 6.401 - NER: -5.993 -1.772 -1.790 -1.494 -1.244 -1.061 -0.492 7.347 - RER: -3.262 -2.616 -2.058 -1.518 -1.074 -0.746 -0.070 5.132 - RIR: -1.041 -1.072 -0.718 -0.449 -0.276 -0.169 -0.003 1.753 - ca: 0.871 0.146 -0.080 -0.133 -0.125 -0.102 -0.014 0.920 - DN: 0.047 -0.048 -0.189 -0.214 -0.186 -0.144 -0.016 0.413 - C: 1.835 1.362 0.875 0.548 0.344 0.219 0.017 2.549 - dz: 12.500 5.625 2.129 0.545 -0.263 -0.641 -7.760 14.265 - mg: -0.343 -2.145 -2.340 -1.919 -1.568 -1.321 -0.607 5.333 ### 5(b): Pre-Stabilization Countries ### Panel 1: Pure Float (Pre-Stabilization) - In: -13.436 -6.132 -4.219 -2.776 -1.885 -1.207 -0.012 15.805 - NER: -17.218 -5.212 -3.442 -2.133 -1.441 -0.870 -0.005 18.533 - RER: -6.051 -4.579 -3.336 -2.307 -1.597 -1.059 -0.013 8.866 - RIR: -0.938 -0.767 -0.499 -0.390 -0.229 -0.185 -0.006 1.406 - ca: 0.791 0.112 -0.121 -0.180 -0.163 -0.132 -0.003 0.864 - DN: -1.377 -1.087 -0.834 -0.577 -0.415 -0.269 -0.003 2.101 - C: 1.511 1.084 0.736 0.509 0.332 0.228 0.004 2.111 - dz: 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 - mg: -10.311 -8.547 -5.233 -2.957 -1.936 -1.061 0.003 14.874 ### Panel 2: Crawl (Pre-Stabilization) - In: -0.047 -0.610 -0.647 -0.566 -0.462 -0.369 -0.133 2.264 - NER: -0.804 -0.771 -0.533 -0.386 -0.293 -0.234 -0.130 2.314 - RER: -1.212 -1.470 -1.289 -1.000 -0.729 -0.513 -0.017 2.709 - RIR: -0.967 -0.707 -0.498 -0.341 -0.230 -0.153 -0.002 1.376 - Ca: 1.220 0.404 0.070 -0.051 -0.081 -0.076 -0.005 1.297 - DN: 0.613 0.165 -0.007 -0.061 -0.067 -0.057 -0.001 0.647 - C: 1.453 1.013 0.692 0.465 0.310 0.206 0.008 2.002 - Dz: 9.650 8.768 5.480 3.432 2.145 1.333 -0.065 14.851 - Mg: -1.753 -1.182 -0.372 -0.069 0.017 0.018 -0.126 2.839 ### Panel 3: Buffer+ Float (Pre-Stabilization) - In: -6.446 -5.966 -3.404 -4.040 -2.182 -2.737 -0.927 11.795 - NER: -8.118 -6.401 -2.556 -4.094 -1.523 -2.811 -0.982 12.694 - RER: -2.675 -3.370 -2.013 -2.099 -1.045 -1.162 -0.136 5.519 - RIR: -2.237 -0.095 -1.222 0.194 -0.716 0.252 0.079 2.761 - va: 0.855 0.272 -0.095 -0.092 -0.171 -0.091 -0.010 0.943 - DN: 0.401 -0.677 -0.140 -0.606 -0.094 -0.395 -0.059 1.135 - C: 1.974 0.957 0.914 0.359 0.447 0.121 -0.003 2.467 - fz: 12.500 5.625 2.219 0.545 -0.263 -0.641 -0.643 14.265 - mg: -1.206 -9.519 -1.819 -5.851 -0.744 -3.974 -1.250 13.246 Notes: see Table 4. Except [4] dr=0.25. ### Table 6. Mixed Foreign Exchange and Bond Sterilization A [50:50] Rule ### Aid Inflow [percent of GDP] (Horizon) - a: 2.000 1.000 0.500 0.250 0.125 0.063 0.001 Post-Stabilization Countries *Source: WIDER_sticky_p_JAN07.mod* ### 1. All Aid Spent with [50:50] Sterilization Rule ### 1. All Aid Spent with [50:50] Sterilization Rule ### Main impulse responses (horizons 0,1,2,3,4,5,15; Stdev in final column) - In: 12.805 4.624 4.195 3.795 3.501 3.275 1.933 18.357 - NER: 15.227 3.014 3.631 3.555 3.394 3.230 1.939 19.639 - RER: 4.404 1.477 0.451 0.015 -0.179 -0.262 -0.209 4.792 - RIR: -1.072 -0.058 0.014 -0.006 -0.021 -0.028 -0.021 1.080 - ca: 1.978 0.962 0.389 0.100 -0.040 -0.105 -0.106 2.297 - DN: 2.494 0.887 0.435 0.256 0.173 0.130 0.058 2.720 - C: 0.831 0.344 0.317 0.324 0.321 0.311 0.189 1.461 - dz: 25.000 11.250 4.438 1.091 -0.526 -1.281 -1.286 28.531 - db: 11.111 5.000 1.972 0.485 -0.234 -0.569 -6.898 12.681 Memo items - Dint (%GDP): -0.218 0.129 0.184 0.184 0.176 0.168 0.101 0.675 Table 4a [Buffer plus Float] - RIR: -1.571 -1.296 -0.847 -0.528 -0.325 -0.199 -0.001 2.305 - Dint (%GDP): 0.117 -0.126 -0.124 -0.092 -0.064 -0.042 -0.000 0.246 --- ### 2. Partial Deficit Reduction with [50:50] Sterilization Rule ### Main impulse responses (horizons 0,1,2,3,4,5,15; Stdev in final column) - In: -0.014 1.370 1.883 2.121 2.212 2.220 1.449 8.529 - NER: -0.809 1.443 2.036 2.255 2.313 2.292 1.454 8.740 - RER: -1.447 -1.313 -1.035 -0.791 -0.608 -0.477 -0.159 2.635 - RIR: -0.022 -0.031 -0.064 -0.070 -0.063 -0.053 -0.016 0.163 - ca: 1.699 0.714 0.244 0.028 -0.067 -0.105 -0.079 1.906 - DN: -0.309 -0.261 -0.155 -0.075 -0.022 0.011 0.043 0.482 - C: 0.387 0.377 0.363 0.334 0.302 0.274 0.142 1.118 - dz: 18.750 8.438 3.328 0.818 -0.395 -0.961 -0.965 21.398 - db: 8.333 3.750 1.480 0.363 -0.175 -0.428 -5.173 7.258 Memo items - Dint (%GDP): -0.072 0.073 0.098 0.109 0.113 0.114 0.076 0.450 Table 5a [Buffer plus Float] - RIR: -1.041 -1.072 -0.718 -0.449 -0.276 -0.169 -0.003 1.753 - Dint (%GDP): 0.161 -0.111 -0.112 -0.082 -0.056 -0.036 -0.000 0.251 Notes: see Table 4. --- ### Table 7. Targeting the Real Exchange Rate Aid inflow [percent of GDP] (a): 2.000 1.000 0.500 0.250 0.125 0.063 0.001 7(a): Aid Fully Spent (horizons 0,1,2,3,4,5,15; Stdev) - In: 6.560 2.798 1.775 0.961 0.411 0.058 -0.436 7.853 - NER: 6.899 2.219 1.696 1.002 0.475 0.115 -0.435 7.945 - RER: 0.617 -0.435 -0.579 -0.504 -0.389 -0.285 -0.052 1.253 - RIR: -1.001 -0.837 -0.706 -0.526 -0.364 -0.241 -0.002 1.645 - ca: 1.174 0.299 -0.035 -0.128 -0.132 -0.109 -0.015 1.239 - DN: 1.709 0.915 0.561 0.344 0.208 0.124 -0.004 2.064 - C: 1.876 1.421 1.041 0.720 0.481 0.315 0.023 2.750 - dz: -9.257 6.988 8.793 7.241 5.140 3.334 -0.432 17.703 - mg: -4.502 3.870 4.877 3.828 2.583 1.560 -0.182 9.515 7(b): Aid Partially Spent (dr=0.25) - In: 3.182 1.524 0.839 0.275 -0.116 -0.370 -0.675 5.452 - NER: 2.999 1.298 0.873 0.355 -0.041 -0.313 -0.674 5.277 - RER: -0.332 -0.742 -0.679 -0.534 -0.399 -0.294 -0.079 1.403 - RIR: -0.660 -0.647 -0.557 -0.417 -0.289 -0.192 -0.003 1.218 - ca: 1.300 0.406 0.049 -0.071 -0.096 -0.088 -0.022 1.381 - DN: 0.971 0.567 0.366 0.232 0.142 0.085 -0.007 1.219 - C: 1.438 1.138 0.844 0.591 0.401 0.270 0.034 2.181 - dz: 4.987 10.876 9.397 6.750 4.379 2.595 -0.688 17.902 - mg: -3.839 2.513 3.202 2.522 1.578 0.792 -0.725 7.671 Notes: see Table 4. --- ### Table 8. Fiscal Smoothing in Post-Stabilization Economies Aid inflow [Percent of GDP] (a): 2.000 1.000 0.500 0.250 0.125 0.063 0.001 Table 8(a): Aid Fully Spent [dr=0.0] 1. Float with fiscal smoothing [c.f. Table 4(a) panel 1] - In: -2.527 2.190 1.715 0.971 0.442 0.141 -0.008 3.912 - NER: -4.604 3.004 2.105 1.171 0.586 0.264 -0.003 6.037 - RER: -3.776 -2.296 -1.588 -1.225 -0.963 -0.739 -0.013 5.061 - RIR: 1.438 0.018 -0.575 -0.644 -0.529 -0.384 -0.003 1.833 - ca: 1.390 0.207 -0.238 -0.335 -0.302 -0.233 -0.003 1.530 - DN: -1.098 0.030 0.334 0.284 0.168 0.076 -0.003 1.197 - C: 0.634 1.287 1.296 1.034 0.742 0.501 0.004 2.405 - dz: 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 - s: 1.000 1.000 0.750 0.500 0.312 0.187 0.000 1.721 - dW: 25.000 0.000 -6.250 -6.250 -4.688 -3.125 -0.011 27.217 2. Crawl with fiscal smoothing [c.f. Table 4(a) panel 2] - In: -0.574 0.225 0.249 0.115 -0.002 -0.067 -0.014 0.707 - NER: -1.666 0.192 0.398 0.299 0.177 0.091 -0.009 1.765 - RER: -1.986 -2.045 -1.773 -1.438 -1.112 -0.826 -0.013 3.990 - RIR: -0.107 -0.307 -0.497 -0.509 -0.427 -0.322 -0.004 0.995 - ca: 1.235 0.252 -0.160 -0.276 -0.266 -0.214 -0.003 1.361 - DN: 0.157 0.095 0.101 0.067 0.026 -0.004 -0.002 0.226 - C: 1.284 1.235 1.096 0.870 0.638 0.444 0.005 2.427 - dz: 22.717 -3.754 -6.378 -4.705 -2.810 -1.494 0.003 24.571 - s: 1.000 1.000 0.750 0.500 0.312 0.187 0.000 1.721 - dW: 25.000 0.000 -6.250 -6.250 -4.688 -3.125 -0.011 27.217 Table 8(b): Aid Not Fully Spent, Sticky Prices with dr=0.25 1. Float with fiscal smoothing [c.f. Table 5(a) panel 1] - In: -11.512 -0.456 0.023 0.003 -0.082 -0.131 -0.007 11.525 - NER: -15.682 1.436 0.891 0.467 0.207 0.067 -0.003 15.781 - RER: -7.581 -4.143 -2.565 -1.721 -1.196 -0.835 -0.012 9.323 - RIR: 1.861 0.026 -0.505 -0.549 -0.444 -0.320 -0.003 2.098 - ca: 1.258 0.148 -0.226 -0.299 -0.263 -0.201 -0.002 1.375 - DN: -3.003 -0.903 -0.231 -0.054 -0.025 -0.029 -0.002 3.145 - C: 0.239 1.085 1.097 0.867 0.618 0.416 0.003 1.966 - dz: 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 - s: 0.750 0.750 0.562 0.375 0.234 0.141 0.000 1.291 - dW: 18.750 -0.000 -4.688 -4.688 -3.516 -2.344 -0.008 20.412 2. Crawl with fiscal smoothing [c.f. Table 5(a) panel 2] - In: -1.263 -0.286 -0.098 -0.104 -0.140 -0.161 -0.087 1.730 - NER: -2.258 -0.269 0.061 0.067 0.015 -0.031 -0.084 2.520 - RER: -1.809 -1.779 -1.490 -1.178 -0.896 -0.659 -0.018 3.423 - RIR: -0.173 -0.239 -0.369 -0.379 -0.320 -0.242 -0.003 0.762 - ca: 1.377 0.416 -0.009 -0.155 -0.176 -0.151 -0.005 1.474 - DN: 0.021 -0.027 0.011 0.012 -0.002 -0.015 -0.002 0.058 - C: 1.012 0.933 0.824 0.657 0.484 0.339 0.008 1.858 - dz: 30.784 2.135 -2.476 -2.440 -1.603 -0.902 -0.068 31.128 - s: 0.750 0.750 0.562 0.375 0.234 0.141 0.000 1.291 - dW: 18.750 0.000 -4.688 -4.688 -3.516 -2.344 -0.008 20.412 3. Buffer+ Float with fiscal smoothing [c.f. Table 5(a) panel 3] - In: -4.567 -1.585 -1.709 -1.606 -1.419 -1.219 -0.418 6.198 - NER: -6.344 -1.121 -1.479 -1.400 -1.225 -1.050 -0.413 7.318 - RER: -3.231 -2.387 -1.968 -1.592 -1.238 -0.930 -0.066 5.095 - RIR: 0.076 -0.536 -0.571 -0.469 -0.348 -0.244 -0.004 1.033 - ca: 1.180 0.234 -0.118 -0.215 -0.211 -0.174 -0.013 1.273 - DN: -0.446 -0.065 -0.077 -0.120 -0.135 -0.128 -0.015 0.539 - C: 1.180 1.215 0.971 0.712 0.499 0.341 0.016 2.188 - dz: 31.250 4.688 -3.359 -4.754 -4.126 -3.138 -0.545 32.797 - s: 0.750 0.750 0.562 0.375 0.234 0.141 0.000 1.291 - dW: 18.750 0.000 -4.688 -4.688 -3.516 -2.344 -0.008 20.412 Notes: see Table 4. [1] smoothing parameter = 0.50. *Source: _wp07180 - 1. All Aid Spent with [50:50] Sterilization Rule (PDF chapter/section).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07180.pdf_