European Parliament Library

Monetary Policy Rules for Managing Aid Surges in Africa, Edward Buffie, Stephen O'Connell, Catherine Pattillo, Christopher Adam

Since the turn of the century, aid flows to Africa have increased on average and become more volatile. As a result, policymakers, particularly in post-stabilization countries where inflation has only recently been brought under control, have been increasingly preoccupied with how best to deploy the available instruments of monetary policy without yielding on hard-won inflation gains. We use a stochastic simulation model, in which private sector currency substitution effects play a central role, to examine the properties of alternative monetary and fiscal policy strategies in the face of volatile aid flows. We show that simple monetary rules, specifically an (unsterilized) exchange rate crawl and a 'reserve buffer plus float'-under which the authorities set a time-varying reserve target corresponding to the unspent portion of aid financing and allow the exchange rate to float freely once this reserve target is satisfied-have attractive properties relative to a range of alternative strategies including those involving heavy reliance on bond sterilization or a commitment to a 'pure' exchange rate float
Table Of Contents
Contents; I. Introduction; II. Basic Structure and Stylized Facts; III. The Simulation Model; A. Basic Design; B. Preferences and Aggregate Demand; C. Aggregate Supply; D. The Public Sector; E. External Shocks; IV. Fiscal and Monetary Policy; A. Model Calibration; V. Results; A. All Aid Is Spent; B. Aid Not Fully Spent; C. Bond Sterilization; D. Real Exchange Rate Targeting; E. Smoothing Public Expenditure; VI. Conclusions and Extensions; Tables; 1. Mean Share of Aid Spent by Country Group; 2. Mean NFA Accumulation and Aid Inflows
Literary Form
non fiction
Description based upon print version of record
Physical Description
1 online resource (42 p.)
Specific Material Designation
Form Of Item

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