The Macroeconomics of Medium-Term Aid Scaling-Up Scenarios

Released on by Jan Gottschalk
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  • The Macroeconomics of Medium-Term Aid Scaling-Up Scenarios Book Detail

  • Author : Jan Gottschalk
  • Release Date : 2010-07-01
  • Publisher : International Monetary Fund
  • Genre : Business & Economics
  • Pages : 47
  • ISBN 13 : 145520143X
  • File Size : 98,98 MB
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The Macroeconomics of Medium-Term Aid Scaling-Up Scenarios by Jan Gottschalk PDF Summary

Book Description: 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.

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Developing countries have for decades been trying to catch up with the industrialized high-income countries, but only a few have succeeded. Historically, struct