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The Macroeconomics of Medium-Term Aid Scaling-Up Scenarios, Rafael Portillo, Andrew Berg, Jan Gottschalk, Luis-Felipe Zanna

We develop a model to analyze the macroeconomic effects of a scaling-up of aid and assess the implications of different policy responses. The model features key structural characteristics of low-income countries, including varying degrees of public investment efficiency and a learning-by-doing (LBD) externality that captures Dutch disease effects. On the policy front, it distinguishes between spending the aid, which is controlled by the fiscal authority, and absorbing the aid - financing a higher current account deficit - which is influenced by the central bank's reserve accumulation policies. We calibrate the model to Uganda and run several experiments. We find that a policy mix that results in full spending and absorption of aid can generate temporary demand and real exchange rate appreciation pressures, but also have a positive effect on real GDP in the medium term, through higher public capital. Full spending with partial absorption, on the other hand, may stem appreciation pressures but can also induce adverse medium-term real GDP effects, through private sector crowding out. When aid is very inefficiently invested and there are strong LBD externalities, aid can be harmful, and partial absorption policies may be justified. But in this case, a welfare improving solution is to defer spending or - even better if possible - raise its efficiency
Table Of Contents
Table of Contents; I. Introduction; II. The Model; A. Households; A.1. Asset Holders; A.2. Hand-to-Mouth Consumers; B. Non-Traded Good Sector; C. Traded Good Sector; D. The Government; E. The Central Bank; F. Aggregation and the Goods Market Equilibrium Conditions; III. Calibration; Tables; 1. Baseline Calibration: Preference Parameters; 2. Baseline Calibration: Technology Parameters; 3. Baseline Calibration: Policy Parameters and Aid Process; IV. Experiments; A. The Baseline Scenario; Figures; 1. Baseline Scenario; B. Partial Aid Absorption Policies
Literary Form
non fiction
Description based upon print version of record
Physical Description
1 online resource (47 p.)
Specific Material Designation
Form Of Item

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