Aid, Disbursement Delays, and the Real Exchange Rate

Aid donors and recipients have long been concerned that aid inflows may lead to an appreciation of the real exchange rate and an associated loss of competitiveness. This paper provides new evidence of the dynamic effects of aid on the real exchange rate, using an identification strategy that exploit...

Full description

Saved in:
Bibliographic Details
Published inIMF economic review Vol. 64; no. 2; pp. 217 - 238
Main Authors JAROTSCHKIN, ALEXANDRA, KRAAY, AART
Format Journal Article
LanguageEnglish
Published London Palgrave Macmillan 01.06.2016
Palgrave Macmillan UK
Palgrave Macmillan Ltd. (Springer)
Subjects
Approval
Capital Markets
Competition
Depreciation
Developing countries
Development banks
Disbursements
Economic Policy
Economics
Economics and Finance
F31
F35
Foreign aid
Foreign exchange
Foreign exchange rates
Identification
International Economics
LDCs
Loans
Macroeconomics
Macroeconomics/Monetary Economics//Financial Economics
Prices and rates
Productivity
Studies
United States
F31
F35
Online AccessGet full text

Cover

More Information
Summary:Aid donors and recipients have long been concerned that aid inflows may lead to an appreciation of the real exchange rate and an associated loss of competitiveness. This paper provides new evidence of the dynamic effects of aid on the real exchange rate, using an identification strategy that exploits the long delays between the approval of aid projects and the subsequent disbursements on them. These disbursement delays enable the isolation of a source of variation in aid inflows that plausibly is uncorrelated with contemporaneous macroeconomic shocks that may drive both aid and the real exchange rate. Using this predetermined component of aid as an instrument, there is little evidence that aid inflows lead to significant real exchange rate appreciations.
ISSN:2041-4161
2041-417X
DOI:10.1057/imfer.2015.7