Exchange Rate Policy and the Management of Official and Private Capital Flows in Africa

54 Pages Posted: 9 Feb 2006

See all articles by Edward F. Buffie

Edward F. Buffie

Indiana University Bloomington - Department of Economics

Stephen A. O'Connell

Swarthmore College - Economics Department; University of Oxford - Centre for Study of African Economics

Catherine A. Pattillo

International Monetary Fund (IMF) - Research Division

Christopher Scott Adam

University of Oxford

Date Written: November 2004

Abstract

We focus on the management of highly persistent shocks to aid flows, including PRSP-related increases in net inflows, in three "post-stabilization." African economies with de jure flexible exchange rates. Such shocks have beneficent long-run effects, but when currency substitution is high they can produce dramatic macroeconomic management problems in the short run. What is the appropriate mix of money and exchange rate targeting in such cases, and what is the role of temporary sterilization? We analyze these issues in an intertemporal optimizing model that allows a portion of aid to be devoted to reducing the government`s seigniorage requirement. This creates a strong link between official aid flows and private capital flows. When the credibility of policymakers` commitment to low inflation is firm, some degree of dirty floating, with little or no sterilization of increases in the monetary base, is the most attractive approach in the short run.

Keywords: Aid, Sterilization, Currency Substitution, Seigniorage, Africa

JEL Classification: O23, E52, F31, F35

Suggested Citation

Buffie, Edward F. and O'Connell, Stephen A. and Pattillo, Catherine and Adam, Christopher Scott, Exchange Rate Policy and the Management of Official and Private Capital Flows in Africa (November 2004). IMF Working Paper No. 04/216. Available at SSRN: https://ssrn.com/abstract=879041

Edward F. Buffie (Contact Author)

Indiana University Bloomington - Department of Economics ( email )

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

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

Catherine Pattillo

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

700 19th Street NW
Washington, DC 20431
United States

Christopher Scott Adam

University of Oxford ( email )

Oxford
United Kingdom

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