{
  "title": "Ramsey-Optimal Fiscal Spending and Reserve Accumulation Policies under Volatile Aid",
  "publication": "IMF Working Papers, August 1, 2025",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2025/08/01/ramsey-optimal-fiscal-spending-and-reserve-accumulation-policies-under-volatile-aid-564190",
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  "summary": "This paper examines Ramsey-optimal policies related to fiscal spending and international reserve accumulation in response to volatile aid flows in Low-Income Countries (LICs).",
  "sections": [
    {
      "heading": "Summary",
      "content": "- Examines Ramsey-optimal policies for fiscal spending and international reserve accumulation in response to volatile aid flows in Low-Income Countries (LICs).\n- Develops a real Dynamic Stochastic General Equilibrium (DSGE) model of a small open economy.\n- Fiscal spending components modeled: government transfers and public investment.\n- Key LIC characteristics incorporated: Dutch disease (DD) externalities and financially constrained households.\n- Central mechanism: precautionary saving leads to partial reserve accumulation and partial fiscal spending of aid."
    },
    {
      "heading": "Model and Assumptions",
      "content": "- Real DSGE framework for a small open economy.\n- Fiscal instruments: transfers (direct support to private consumption) and public investment (contributes to future income via capital accumulation).\n- Features emphasized: DD externalities; financially constrained households.\n- Objective: Ramsey-optimal allocation considering volatility of aid."
    },
    {
      "heading": "Major Findings",
      "content": "- Ramsey-optimal policies involve:\n  - Partial reserve accumulation.\n  - Partial fiscal spending of aid.\n- Role of Dutch disease externalities:\n  - Stronger DD externalities require greater reserve accumulation to stabilize future output and mitigate consumption volatility.\n- Role of fiscal instruments:\n  - Transfers directly support private consumption smoothing.\n  - Public investment sustains future income through gradual capital accumulation and contributes to consumption smoothing.\n- Role of aid volatility:\n  - Higher aid volatility calls for increased public investment.\n  - Public capital accumulation functions as a precautionary saving instrument in addition to its developmental role."
    },
    {
      "heading": "Policy Implications and Recommendations",
      "content": "- Adopt policies that balance reserve accumulation and fiscal spending rather than fully spending or fully saving aid:\n  - Use partial reserve accumulation to stabilize output under strong DD externalities.\n  - Use transfers to smooth private consumption in the short run.\n  - Increase public investment when aid volatility is higher to accumulate public capital as precautionary saving for future income stabilization.\n- Recognize public investment’s dual role:\n  - Developmental role (long-run income effects).\n  - Precautionary saving role (insuring against aid volatility and smoothing consumption).\n\n---\n\n Content in this bundle\n\n- Working Paper\n  - Working Paper (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Working Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2025/08/01/ramsey-optimal-fiscal-spending-and-reserve-accumulation-policies-under-volatile-aid-564190"
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    "Authors: Ioana Moldovan, Shu-Chun S. Yang, Luis-Felipe Zanna",
    "Published: August 1, 2025",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9798229006798.001",
    "Examines Ramsey-optimal policies for fiscal spending and international reserve accumulation in response to volatile aid flows in Low-Income Countries (LICs).",
    "Develops a real Dynamic Stochastic General Equilibrium (DSGE) model of a small open economy.",
    "Fiscal spending components modeled: government transfers and public investment.",
    "Key LIC characteristics incorporated: Dutch disease (DD) externalities and financially constrained households.",
    "Central mechanism: precautionary saving leads to partial reserve accumulation and partial fiscal spending of aid.",
    "Real DSGE framework for a small open economy.",
    "Fiscal instruments: transfers (direct support to private consumption) and public investment (contributes to future income via capital accumulation).",
    "Features emphasized: DD externalities; financially constrained households.",
    "Objective: Ramsey-optimal allocation considering volatility of aid.",
    "Ramsey-optimal policies involve:",
    "Role of Dutch disease externalities:",
    "Role of fiscal instruments:",
    "Role of aid volatility:",
    "Adopt policies that balance reserve accumulation and fiscal spending rather than fully spending or fully saving aid:",
    "Recognize public investment’s dual role:",
    "**Working Paper**"
  ],
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