Aid Volatility, Monetary Policy Rules and the Capital Account in African Economies

World Economy & Finance Research Programme Working Paper No. 0037

34 Pages Posted: 12 Jun 2008

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

Date Written: June 2008

Abstract

We examine the properties of simple quantity-based monetary policy rules of the kind widely used in low-income African economies. Using a DSGE model and focusing our attention on responses to positive aid shocks, we suggest that policy rules involving substantial reserve accumulation in the face of aid surges serve to ease macroeconomic adjustment to shocks, particularly when a portion of aid is used to support fiscal adjustment. These rules are robust to assumptions about the degree of integration of the domestic public debt market with world capital markets. Although an open capital account facilitates smoother adjustment to temporary aid surges when an aid inflow is fully spent, it exacerbates the adjustment problem when aid is accompanied by fiscal adjustment and hence reinforces the case for a managed float in such circumstances.

Keywords: Monetary policy, Africa, Aid volatility, foreign capital flows, stochastic simulation models

Suggested Citation

Adam, Christopher Scott and O'Connell, Stephen A. and Buffie, Edward F., Aid Volatility, Monetary Policy Rules and the Capital Account in African Economies (June 2008). World Economy & Finance Research Programme Working Paper No. 0037. Available at SSRN: https://ssrn.com/abstract=1143463 or http://dx.doi.org/10.2139/ssrn.1143463

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)

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