Exchange Rate Policy and the Management of Official and Private Capital Flows in Africa
54 Pages Posted: 9 Feb 2006
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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
By A. Craig Burnside and David Dollar
-
Aid, Policies, and Growth: Revisiting the Evidence
By A. Craig Burnside and David Dollar
-
Who Gives Foreign Aid to Whom and Why?
By Alberto F. Alesina and David Dollar
-
Aid Allocation and Poverty Reduction
By David Dollar and Paul Collier
-
Aid and Growth: What Does the Cross-Country Evidence Really Show?
-
Aid and Growth: What Does the Cross-Country Evidence Really Show?
-
New Data, New Doubts: Revisiting 'Aid, Policies, and Growth'
By William Easterly, Ross Levine, ...
-
New Data, New Doubts: A Comment on Burnside and Dollar's "Aid, Policies, and Growth" (2000)
By William Easterly, Ross Levine, ...