Fiscal Inertia, Donor Credibility, And The Monetary Management Of Aid Surges

Authors

E. Buffie
Stephen A. O'Connell, Swarthmore CollegeFollow
C. Adam

Document Type

Article

Publication Date

11-1-2010

Published In

Journal Of Development Economics

Abstract

Donors cannot pre-commit to support scaled-up public spending programs on a continuing basis, nor can governments credibly commit to curtail expenditure rapidly in the event that aid revenues contract. An aid boom may therefore be accompanied by a credibility problem. When this is the case, the absorb-and-spend strategy recommended by the IMF leads to capital flight, higher inflation, and large current account surpluses inclusive of aid. The right policy package combines a critical minimum degree of fiscal restraint with reverse sterilization.

Recommended Citation

E. Buffie, Stephen A. O'Connell, and C. Adam. (2010). "Fiscal Inertia, Donor Credibility, And The Monetary Management Of Aid Surges". Journal Of Development Economics. Volume 93, Issue 2. 287-298. DOI: 10.1016/j.jdeveco.2009.09.006
https://works.swarthmore.edu/fac-economics/49