Aid, Growth, and Real Exchange Rate Dynamics

44 Pages Posted: 20 Apr 2016

See all articles by Shantayanan Devarajan

Shantayanan Devarajan

World Bank Middle East and North Africa Region

Delfin S. Go

Development Prospects Group, The World Bank

John Page

World Bank

Sherman Robinson

International Food Policy Research Institute (IFPRI)

Karen Thierfelder

United States Naval Academy - Department of Economics

Date Written: January 1, 2008

Abstract

Devarajan, Go, Page, Robinson, and Thierfelder argued that if aid is about the future and recipients are able to plan consumption and investment decisions optimally over time, then the potential problem of an aid-induced appreciation of the real exchange rate (Dutch disease) does not occur. In their paper, "Aid, Growth and Real Exchange Rate Dynamics," this key result is derived without requiring extreme assumptions or additional productivity story. The economic framework is a standard neoclassical growth model, based on the familiar Salter-Swan characterization of an open economy, with full dynamic savings and investment decisions. It does require that the model is fully dynamic in both savings and investment decisions. An important assumption is that aid should be predictable for intertemporal smoothing to take place. If aid volatility forces recipients to be constrained and myopic, Dutch disease problems become an issue.

Keywords: Economic Theory & Research, Debt Markets, Currencies and Exchange Rates, Emerging Markets

Suggested Citation

Devarajan, Shantayanan and Go, Delfin S. and Page, John and Robinson, Sherman and Thierfelder, Karen, Aid, Growth, and Real Exchange Rate Dynamics (January 1, 2008). World Bank Policy Research Working Paper Series, Vol. , pp. -, 2008. Available at SSRN: https://ssrn.com/abstract=1085105

Shantayanan Devarajan

World Bank Middle East and North Africa Region ( email )

1818 H Street, NW
Washington, DC 20433
United States

Delfin S. Go

Development Prospects Group, The World Bank ( email )

1818 H Street
Washington, DC 20433
United States

John Page

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Sherman Robinson

International Food Policy Research Institute (IFPRI) ( email )

1201 Eye St, NW,
Washington, DC 20005
United States

Karen Thierfelder (Contact Author)

United States Naval Academy - Department of Economics ( email )

589 McNair Road
Annapolis, MD 21402
United States

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