Exchange Rate Policy and the Management of Official and Private Capital Flows in Africa

By Catherine A Pattillo, Stephen A. O'Connell, Christopher S Adam, Edward F Buffie

November 1, 2004

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Catherine A Pattillo, Stephen A. O'Connell, Christopher S Adam, and Edward F Buffie. Exchange Rate Policy and the Management of Official and Private Capital Flows in Africa, (USA: International Monetary Fund, 2004) accessed December 22, 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

We focus on the management of highly persistent shocks to aid flows, including PRSP-related increases in net inflows, in three “post-stabilization.” African economies with de jure flexible exchange rates. Such shocks have beneficent long-run effects, but when currency substitution is high they can produce dramatic macroeconomic management problems in the short run. What is the appropriate mix of money and exchange rate targeting in such cases, and what is the role of temporary sterilization? We analyze these issues in an intertemporal optimizing model that allows a portion of aid to be devoted to reducing the government’s seigniorage requirement. This creates a strong link between official aid flows and private capital flows. When the credibility of policymakers’ commitment to low inflation is firm, some degree of dirty floating, with little or no sterilization of increases in the monetary base, is the most attractive approach in the short run.

Subject: Crawling peg, Exchange rates, Inflation, Real exchange rates, Real interest rates

Keywords: Current account, Exchange rate, WP

Publication Details

Pages:

53
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2004/216
Stock No:

WPIEA2162004
ISBN:

9781451875119
ISSN:

1018-5941

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