The Macroeconomics of Scaling Up Aid

This study analyzes key issues associated with large increases in aid, including absorptive capacity, Dutch disease, and inflation. The authors develop a framework that emphasizes the different roles of monetary and fiscal policy and apply it to the recent experience of five countries: Ethiopia, Ghana, Mozambique, Tanzania, and Uganda. These countries have often found it difficult to coordinate monetary and fiscal policy in the face of conflicting objectives, notably to spend the aid money on domestic goods and to avoid excessive exchange rate appreciation.Absorptive capacity;exchange rate, foreign exchange, inflation, real exchange rate, monetary policy, effective exchange rate, real effective exchange rate, terms of trade, nominal exchange rate, money growth, exchange rate appreciation, money supply, foreign exchange sales, exchange sales, exchange rates, real exchange rate appreciation, aggregate demand, foreign currency, foreign exchange market, inflationary pressures, current account balance, nominal effective exchange rate, high inflation, real interest rates, real exchange rates, macroeconomic stability, exchange rate policy, inflation tax, effective exchange rates, nominal interest rates, exchange rate regime, currency substitution, lower inflation, exchange rate depreciation, real money, rate of inflation, increase in inflation, exchange rate peg, exchange rate movements, high interest rates, exchange reserves, price level, low inflation, rise in inflation, price inflation, currency depreciation, macroeconomic performance, foreign exchange reserves, inflation stabilization, price stability, exchange rate overshooting, exchange rate management, relative price, exchange rate policies, real value, nominal variables, monetary economics, exchange rate appreciations, nominal exchange rate depreciation, inflationary impact, real wages, real effective exchange rates, monetary financing, real exchange rate appreciations, exchange rate misalignment, real money supply, nominal exchange rates, independent central bank, financial stability, exchange rate regimes, exchange rate stability, inflation rate, real exchange rate misalignment, inflationary expectations, real exchange rate overshooting, real rates, exchange rate depreciations, printing money, real exchange rate movements, exchange rate flexibility, floating exchange rate, exchange rate volatility, floating exchange rate regime, relative prices, nominal exchange rate stability, exchange rate dynamics, exchange rate adjustment, exchange rate channel, foreign exchange markets, fall in inflation, inflationary pressure, exchange rate overvaluations, inflation rates, low rate of inflation, dollar value, exchange markets