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Monetary Policy in Sub-Saharan Africa$
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Andrew Berg and Rafael Portillo

Print publication date: 2018

Print ISBN-13: 9780198785811

Published to Oxford Scholarship Online: April 2018

DOI: 10.1093/oso/9780198785811.001.0001

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The Short-Run Macroeconomics of Aid Inflows

The Short-Run Macroeconomics of Aid Inflows

Understanding the Interaction of Fiscal and International Reserve Policy

(p.210) Chapter 12 The Short-Run Macroeconomics of Aid Inflows
Monetary Policy in Sub-Saharan Africa

Andrew Berg

Tokhir Mirzoev

Rafael Portillo

Luis-Felipe Zanna

Oxford University Press

The authors develop a tractable two-sector New Keynesian model to analyse the short-term effects of aid-financed fiscal expansions. The analysis distinguishes between spending the aid (increasing expenditures and/or cutting revenues) and absorbing the aid—using the aid to finance a higher current account deficit. The standard treatment of the transfer problem implicitly assumes spending equals absorption. Here, a policy mix that results in spending but not absorbing the aid, a common reaction, generates demand pressures and results in an increase in real interest rates. It can also lead to a temporary real depreciation. Certain features of low-income countries, such as limited domestic financial markets, make a real depreciation more likely. The analysis presented in the chapter can help understand the experience of Uganda in the early 2000s.

Keywords:   Aid, transfer problem, fiscal policy, monetary policy real exchange rate, sub-Saharan Africa, sterilized intervention, managed floats, developing countries, low-income countries

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