Monetary Policy Rules for Managing Aid Surges in Africa
Christopher Scott Adam
University of Oxford
Stephen A. O'Connell
Swarthmore College - Economics Department; University of Oxford - Centre for Study of African Economics
Edward F. Buffie
Indiana University Bloomington - Department of Economics
Catherine A. Pattillo
International Monetary Fund (IMF) - Research Division
WEF Working Paper No. 0016
We examine the properties of alternative monetary policy rules in response to large aid surges in low-income countries characterized by incomplete capital market integration and currency substitution. Using a dynamic stochastic general equilibrium model, we show that simple monetary rules that stabilize the path of expected future seigniorage for a given aid flow have attractive properties relative to a range of conventional alternatives including those involving heavy reliance on bond sterilization or a commitment to a pure exchange rate float. These simple rules, which are shown to be robust across a range of fiscal responses to aid inflows, appear to be consistent with actual responses to recent aid surges in a range of post-stabilization countries in Sub-Saharan Africa.
Number of Pages in PDF File: 36
Keywords: monetary policy, currency substitution, aid, Africa, DSGE models,working papers series
Date posted: November 2, 2007
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