Monetary Policy Rules for Managing Aid Surges in Africa

WEF Working Paper No. 0016

36 Pages Posted: 2 Nov 2007

See all articles by Christopher Scott Adam

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

Multiple version iconThere are 2 versions of this paper

Date Written: February 2007

Abstract

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.

Keywords: monetary policy, currency substitution, aid, Africa, DSGE models,

Suggested Citation

Adam, Christopher Scott and O'Connell, Stephen A. and Buffie, Edward F. and Pattillo, Catherine, Monetary Policy Rules for Managing Aid Surges in Africa (February 2007). Available at SSRN: https://ssrn.com/abstract=1026243 or http://dx.doi.org/10.2139/ssrn.1026243

Christopher Scott Adam (Contact Author)

University of Oxford ( email )

Oxford
United Kingdom

Stephen A. O'Connell

Swarthmore College - Economics Department ( email )

Swarthmore, PA 19081
United States
610-328-8107 (Phone)
610-328-7352 (Fax)

HOME PAGE: http://www.swarthmore.edu/SocSci/soconne1/

University of Oxford - Centre for Study of African Economics

Wellington Square
Oxford OX1 3JP
United Kingdom

Edward F. Buffie

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall 105
107 S. Indiana Avenue
Bloomington, IN 47405-7000
United States
812-855-4848 (Phone)

Catherine Pattillo

International Monetary Fund (IMF) - Research Division ( email )

700 19th Street NW
Washington, DC 20431
United States

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