Aid, Growth, and Real Exchange Rate Dynamics

Devarajan, Go, Page, Robinson, and Thierfelder argued that if aid is about the future and recipients are able to plan consumption and investment decisions optimally over time, then the potential problem of an aid-induced appreciation of the real exchange rate (Dutch disease) does not occur. In their paper, "Aid, Growth and Real Exchange Rate Dynamics," this key result is derived without requiring extreme assumptions or additional productivity story. The economic framework is a standard neoclassical growth model, based on the familiar Salter-Swan characterization of an open economy, with full dynamic savings and investment decisions. It does require that the model is fully dynamic in both savings and investment decisions. An important assumption is that aid should be predictable for intertemporal smoothing to take place. If aid volatility forces recipients to be constrained and myopic, Dutch disease problems become an issue.

Bibliographic Details

Main Authors:	Devarajan, Shantayanan, Go, Delfin S., Page, John, Robinson, Sherman, Thierfelder, Karen
Format:	Policy Research Working Paper biblioteca
Language:	English
Published:	World Bank, Washington, DC 2008-01
Subjects:	ABSORPTIVE CAPACITY, ADJUSTMENT COST, ADJUSTMENT COST FUNCTION, ADJUSTMENT COSTS, AGGREGATE CONSUMPTION, AGGREGATE DEMAND, AGGREGATE SUPPLY, BALANCE OF PAYMENTS, BALANCE OF TRADE, BASE YEAR, BEHAVIOR OF INVESTMENT, BID, BUDGET CONSTRAINT, CAPITAL ACCUMULATION, CAPITAL FORMATION, CAPITAL GOODS, CAPITAL GOODS IMPORT, CAPITAL INFLOW, CAPITAL INFLOWS, CAPITAL STOCK, COMMERCIAL LOAN, COMMERCIAL LOANS, COMMODITY PRICES, COMPETITIVENESS, CONSUMER PREFERENCES, CONSUMERS, CONSUMPTION DECLINES, CONSUMPTION EXPENDITURES, CONSUMPTION SMOOTHING, CORPORATE INVESTMENT, COST OF INVESTMENT, CURRENCY, CURRENT ACCOUNT, CURRENT ACCOUNT BALANCE, DEBT, DEBT ACCUMULATION, DEBT CRISIS, DEBT MARKET, DEBT RATIO, DEBT REDUCTION, DEBT RELIEF, DEBT REPAYMENTS, DEBT SERVICE, DEBT STOCK, DEBT SUSTAINABILITY, DEFAULT RISK, DEPRECIATION, DEPRECIATION RATE, DEPRESSION, DEVELOPING COUNTRIES, DEVELOPING COUNTRY, DEVELOPMENT ECONOMICS, DIRECTION OF TRADE, DISBURSEMENTS, DISCOUNT RATE, DISCOUNT RATES, DOMESTIC GOOD, DOMESTIC GOODS, DOMESTIC INTEREST RATE, DOMESTIC PRICE, DOMESTIC PRICES, DUTCH DISEASE, DYNAMIC ANALYSES, DYNAMIC CONSISTENCY, ECONOMETRIC ESTIMATES, ECONOMIC DEVELOPMENT, ECONOMIC GROWTH, ECONOMIC OUTCOMES, ECONOMIC POLICIES, ECONOMIC RESEARCH, ECONOMIC THEORY, ELASTICITY, ELASTICITY OF SUBSTITUTION, EQUATIONS, EQUILIBRIUM, EXCHANGE RATE DYNAMICS, EXOGENOUS SHOCKS, EXPENDITURE, EXPENDITURES, EXPORT COMPETITIVENESS, EXPORT PERFORMANCE, EXPORT SHARE, EXPORT SHARES, EXPORTS, EXTERNAL BORROWING, EXTERNAL BORROWINGS, EXTERNAL DEBT, EXTERNAL FINANCING, EXTERNAL SHOCK, EXTERNAL SHOCKS, EXTERNALITIES, EXTREME POVERTY, FISCAL POLICY, FIXED EXCHANGE RATE, FOREIGN CAPITAL, FOREIGN DEBT, FOREIGN INDEBTEDNESS, FOREIGN INFLOWS, FOREIGN INVESTMENTS, FREE TRADE, GDP, GENERAL EQUILIBRIUM, GENERAL EQUILIBRIUM MODEL, GLOBAL ECONOMY, GLOBALIZATION, GOVERNMENT BUDGET, GOVERNMENT REVENUE, GOVERNMENT SAVINGS, GROSS DOMESTIC PRODUCT, GROWTH RATE, GROWTH RATES, HUMAN CAPITAL, IMPORT, IMPORT DEMAND, IMPORT PRICE, IMPORT PRICES, IMPORT TARIFFS, IMPORTS, INCENTIVE EFFECTS, INCOME, INCOME LEVELS, INCOME TAX, INDUSTRIALIZATION, INTEREST PARITY, INTEREST RATE, INTEREST RATES, INTERNATIONAL BANK, INTERNATIONAL DEVELOPMENT, INTERNATIONAL FINANCE, INTERNATIONAL LENDING, INTERNATIONAL RESERVES, INTERNATIONAL TRADE, INVESTING, INVESTMENT CAPITAL, INVESTMENT DECISIONS, INVESTMENT EXPENDITURE, INVESTMENT EXPENDITURES, INVESTMENT RATIO, INVESTMENT RISES, LABOR MARKET, LOW-INCOME COUNTRIES, LOW-INCOME COUNTRY, MACROECONOMIC INSTABILITY, MACROECONOMIC MANAGEMENT, MACROECONOMIC STABILITY, MACROECONOMICS, MARGINAL COST, MARGINAL PRODUCTIVITY, MARKET DISCOUNT, MARKET EQUILIBRIUM, MONETARY FUND, NOMINAL EXCHANGE RATE, OIL RESERVES, OPEN ECONOMY, OPTIMAL INVESTMENT, OPTIMIZATION, OVERVALUATION, POLICY RESPONSE, POLICY RESPONSES, PRICE CHANGE, PRICE HIKE, PRICE OF EXPORTS, PRICE OF INVESTMENT GOODS, PRIVATE CAPITAL, PRODUCTION FUNCTION, PRODUCTIVITY, PRODUCTIVITY GROWTH, PUBLIC EXPENDITURES, PUBLIC EXTERNAL DEBT, PUBLIC INVESTMENT, PURCHASE PRICE, PURCHASING POWER, RATE OF RETURN, REAL APPRECIATION, REAL DEPRECIATION, REAL EXCHANGE APPRECIATION, REAL EXCHANGE RATE, REAL EXCHANGE RATE ^ ^ ^ CHANGE, REAL EXCHANGE RATE APPRECIATION, REAL EXCHANGE RATES, RELATIVE PRICE, RELATIVE PRICES, REMITTANCES, REPAYMENT, REPUDIATION, RESERVES, RETURN, RETURNS, RISK PREMIUM, SAVINGS, SIDE EFFECTS, SOVEREIGN RISK, STEADY STATE, STOCK MARKET, STRONG COMMODITY, SUPPLY CURVE, SUPPLY RESPONSE, SUPPLY SIDE, TAX, TAX CREDITS, TAX RATE, TAXATION, TIME HORIZON, TOTAL FACTOR PRODUCTIVITY, TOTAL INVESTMENT, TRADE BALANCE, TRADE LIBERALIZATION, TRADE OPENNESS, TRADE POLICY, TRADE SHARE, TRADE SHARES, TRADE SHOCK, UNCERTAINTY, VALUE ADDED, WORLD ECONOMY, WORLD INTEREST RATE, WORLD MARKETS, WORLD PRICE,
Online Access:	http://documents.worldbank.org/curated/en/2008/01/8947106/aid-growth-real-exchange-rate-dynamics http://hdl.handle.net/10986/6482
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