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Monetary Policy Rules for Managing Aid Surges in Africa
Author(s) -
Adam Christopher,
O'Connell Stephen,
Buffie Edward,
Pattillo Catherine
Publication year - 2009
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/j.1467-9361.2009.00502.x
Subject(s) - seigniorage , economics , currency substitution , float (project management) , monetary policy , monetary economics , exchange rate , sterilization (economics) , currency , general equilibrium theory , macroeconomics , international economics , central bank , foreign exchange risk , management
This paper examines 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, it is shown 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.