The Short-Run Macroeconomics of Aid Inflows: Understanding the Interaction of Fiscal and Reserve Policy

On the Optimal Adherence to Money Targets in a New-Keynesian Framework: An Application to Low-Income Countries

“…Indeed, we see this paper as part of a broader research program to bring modern analytic frameworks to bear on the macroeconomic policy challenges of low-income countries. Thus, Berg, Mirzoev, Portillo, and Zanna (2010) build a tractable open economy new-Keynesian model with a number of LIC-specific features to better understand how the interaction of fiscal and monetary policies affect the macroeconomic effect of aid shocks. Berg, Gottschalk, Portillo and Zanna (2010) apply a two-sector growth model that focusses on the role of public investment to analyze the medium-long-run implications of persistent aid shocks.…”

The Macroeconomics of Medium-Term Aid Scaling-Up Scenarios

“…The presence of hand-to-mouth consumers can give …scal policy and aggregate demand larger real e¤ects, including appreciation e¤ects, in the short run; the degree of access to international capital markets controls the e¤ectiveness of sterilized interventions; and the degree of factor mobility a¤ects the degree of real exchange rate appreciation. We refer the interested reader to Berg et al (2010) that discuss in detail the role of all these features in a short-run analysis of policy responses to aid shocks.…”

“…Our work distinguishes itself from the literature by simultaneously analyzing both short-term (demand) and the medium-term (supply) e¤ects, in a context where …scal and central bank policies shape the spending and absorption of aid and matter for medium-term outcomes. Adam et al (2009), our previous work Berg et al (2010), Bu¢ e et al (2008, and Prati and Tressel (2006), among others, also focus on the e¤ects of various policy responses to aid in ‡ows, but they do so in models where sectoral output is exogenous or capital accumulation is absent. The absence of capital accumulation is a notable simpli…cation, given that all the way from the work of Keynes (1936) and Hicks (1939) to that of Kydland and Prescott (1982), macroeconomic theories have underscored investment dynamics as an important channel for the transmission of aggregate shocks.…”

Policy Responses to Aid Surges in Countries with Limited International Capital Mobility: The Role of the Exchange Rate Regime

“…In practice there is no institutional arrangement that ensures coordination between the two policies, thus allowing for the spending without absorbing policy mix described above. 4 In previous work, Berg et al (2010aBerg et al ( , 2010b have used this typology to model the e¤ects of aid surges-episodes of large and persistent yet temporary increases in aid-under managed ‡oats, in both the short and medium term. Berg et al (2010a) developed a tractable new-Keynesian model with traded and non-traded goods to study short-run e¤ects.…”

“…4 In previous work, Berg et al (2010aBerg et al ( , 2010b have used this typology to model the e¤ects of aid surges-episodes of large and persistent yet temporary increases in aid-under managed ‡oats, in both the short and medium term. Berg et al (2010a) developed a tractable new-Keynesian model with traded and non-traded goods to study short-run e¤ects. Unlike the predictions of the standard transfer problem analysis, these authors showed that a policy of spending but not absorbing the aid can result in both a real and nominal depreciation if the resulting demand pressures, due to the …scal expansion, are strong enough to threaten external balance.…”