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.
Summary: | 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. |
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