Aid ‘surges' benefit countries where currency or inflation is allowed to rise
'Surges' in financial aid from overseas can be almost entirely absorbed under a floating exchange rate or a peg, absent sterilisation, but if they result in a large accumulation of reserves, they are welfare reducing, according to an IMF working paper published last week.
In Policy Responses to Aid Surges in Countries with Limited International Capital Mobility: The Role of the Exchange Rate Regime, authors Andrew Berg, Rafael Portillo and Luis-Felipe Zanna study the role of the exchange rate
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