We examine 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, we show that simple monetary rules that...

This paper investigates the macroeconomic challenges created by a surge in aid inflows. It develops an analytical framework for examining possible policy responses to increased aid, in terms of absorption and spending of aid - where the central bank controls absorption through monetary policy...

Japan has emerged in recent years as a leading donor country to African countries. At one level, Japan’s renewed assertiveness in providing foreign aid to Africa is on par with the more active approach by other donor countries. Some might argue that Japan’s motivations to lend capital and...

The impact of aid inflows on relative prices and output is ambiguous. Aid inflows that increase domestic expenditure are likely to cause real exchange rate appreciation, ceteris paribus. However, if this expenditure raises the capital stock in the traded goods sector, then output in this sector...

While we know a lot about how countries become prosperous, we have only begun to understand how aid contributes to economic growth and poverty reduction. The development record is mixed and no robust association between the volume of aid and development performance has been discovered. The...

The expected increase in aid to Africa will put a big challenge for public service delivery. Using a simultaneous equation model, this paper provides an analysis of the effects of the volume and volatility of aid on education, health, water and sanitation outcomes, taking also into account the...