Generating sustained growth in Sub-Saharan Africa is one of the most pressing challenges in global development. As the region needs foreign assistance to jump start its development, foreign aid becomes crucial. However, aid booms can also lead to exchange rate overvaluation curtailing exports...

Edwards and Savastano's (2000) survey identify two important limitations of the real exchange rate (RER) literature: the lack of explicit derivation of flow and stock equilibrium variables as determinants of the equilibrium RER and the failure to allow for unemployment. This paper develops a...