The Macroeconomics of Medium-Term Aid Scaling-Up Scenarios
IMF Working Papers, July 1, 2010
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Bibliographic details
- Authors: Rafael A Portillo, Andrew Berg, Jan Gottschalk, Luis-Felipe Zanna
- Published: July 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455201433.001
Model structure and calibration
- The model analyzes the macroeconomic effects of a scaling-up of aid and the implications of different policy responses.
- Key structural characteristics included:
- varying degrees of public investment efficiency
- a learning-by-doing (LBD) externality that captures Dutch disease effects
- Policy distinctions:
- "Spending the aid" — controlled by the fiscal authority
- "Absorbing the aid" — financing a higher current account deficit, influenced by the central bank's reserve accumulation policies
- Calibration:
- The model is calibrated to Uganda and several experiments are run.
Experimental scenarios and mechanisms
- Full spending and full absorption of aid
- Results in temporary demand pressures
- Results in real exchange rate appreciation pressures
- Generates positive effects on real GDP in the medium term through higher public capital
- Full spending with partial absorption
- May stem appreciation pressures
- May induce adverse medium-term real GDP effects via private sector crowding out
- Very inefficient public investment combined with strong LBD externalities
- Aid can be harmful
- Partial absorption policies may be justified
- Alternative policy responses: defer spending or raise spending efficiency
Main findings
- A policy mix that results in full spending and absorption of aid:
- Can generate temporary demand and real exchange rate appreciation pressures
- Can have a positive effect on real GDP in the medium term through higher public capital
- Full spending with partial absorption:
- Can stem appreciation pressures
- Can induce adverse medium-term real GDP effects through private sector crowding out
- When aid is very inefficiently invested and LBD externalities are strong:
- Aid can be harmful
- Partial absorption policies may be justified
- Welfare-improving alternatives include deferring spending or raising its efficiency
Policy implications and recommendations
- Where public investment is reasonably efficient and LBD externalities are not dominant:
- Consider policies that allow both spending and absorption to realize medium-term GDP gains from higher public capital, while managing temporary demand and exchange rate pressures
- Where public investment is very inefficient or LBD externalities are strong:
- Partial absorption policies may be warranted to avoid harm
- Preferable policy responses include:
- Deferring spending
- Raising public investment efficiency if possible
The Macroeconomics of Medium-Term Aid Scaling-Up Scenarios — Rafael A Portillo, Andrew Berg, Jan Gottschalk, Luis-Felipe Zanna; July 1, 2010.