Foreign Aid and Real Exchange Rate Adjustments in a Financially Constrained Dependent Economy

By Stephen J. Turnovsky, Serpil Tekin, Valerie Cerra

August 1, 2008

Preview Citation

Format: Chicago

Stephen J. Turnovsky, Serpil Tekin, and Valerie Cerra. Foreign Aid and Real Exchange Rate Adjustments in a Financially Constrained Dependent Economy, (USA: International Monetary Fund, 2008) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

A dynamic dependent-economy model is developed to investigate the role of the real exchange rate in determining the effects of foreign aid. If capital is perfectly mobile between sectors, untied aid has no longrun impact on the real exchange rate. A decline in the traded sector occurs because aid, being denominated in traded output, substitutes for exports in financing imports. While untied aid causes short-run real exchange appreciation, this response is very temporary and negligibly small. Tied aid, by influencing sectoral productivity, does generate permanent relative price effects. The analysis, which employs extensive numerical simulations, emphasizes the tradeoffs between real exchange adjustments, long-run capital accumulation, and economic welfare, associated with alternative forms of foreign aid.

Subject: Capital productivity, Consumption, Expenditure, Foreign aid, Real exchange rates

Keywords: Capital stock, Mover accent, WP

Publication Details

Pages:

45
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2008/204
Stock No:

WPIEA2008204
ISBN:

9781451870626
ISSN:

1018-5941

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