Optimal Fiscal Spending and Reserve Accumulation Policies Under Volatile Aid

This paper assesses the optimal setting of fiscal spending and foreign exchange rate intervention policies in response to volatile foreign aid,

From:
Foreign, Commonwealth & Development Office
Published
26 January 2021
Document Type:
Working Paper
皇冠体育appme:
Economic Growth
First published:
11 June 2020
Authors:
Moldovan, I.R, Yang, S-C. S and Zanna, L-F

Abstract

This paper assesses the optimal setting of fiscal spending and foreign exchange rate intervention policies in response to volatile foreign aid, in a small open economy model that incorporates typical features of low-income countries. Within a class of policy rules, it jointly considers the optimal aid spending and international reserve accumulation policies. 皇冠体育app results show that it is optimal to adjust government spending gradually in response to unpredictable fluctuations in aid, while partially accumulating foreign exchange reserves to offset Dutch disease effects. Also, allocating relatively more of the government spending to productive public investment, and less to government consumption, is welfare improving.

This work is part of the 鈥楳acroeconomics in Low-income countries鈥� programme

Citation

Ioana R. Moldovan, Shu-Chun Susan Yang, and Luis-Felipe Zanna. Optimal Fiscal Spending and Reserve Accumulation Policies Under Volatile Aid. IMF Working Paper No. 19/126

Updates to this page

Published 26 January 2021
Contents