TY - BOOK ID - 84543106 TI - The Short-Run Macroeconomics of Aid Inflows : Understanding the Interaction of Fiscal and Reserve Policy AU - Zanna, Luis-Felipe. AU - Berg, Andrew. AU - Mirzoev, Tokhir. AU - Portillo, Rafael. AU - International Monetary Fund. PY - 2010 SN - 1462350704 9786612845581 1452775273 1451982097 1282845586 PB - Washington, D.C. : International Monetary Fund, DB - UniCat KW - Banks and Banking KW - Foreign Exchange KW - Labor KW - Macroeconomics KW - Public Finance KW - Interest Rates: Determination, Term Structure, and Effects KW - Macroeconomics: Consumption KW - Saving KW - Wealth KW - National Government Expenditures and Related Policies: General KW - Demand and Supply of Labor: General KW - Currency KW - Foreign exchange KW - Finance KW - Public finance & taxation KW - Labour KW - income economics KW - Real exchange rates KW - Real interest rates KW - Consumption KW - Expenditure KW - Labor supply KW - Interest rates KW - Economics KW - Expenditures, Public KW - Labor market KW - Uganda KW - Economic assistance KW - Foreign exchange rates KW - Fiscal policy KW - Developing countries KW - Economic policy. KW - Economic conditions. KW - Income economics UR - https://www.unicat.be/uniCat?func=search&query=sysid:84543106 AB - We develop a tractable open-economy new-Keynesian model with two sectors to analyze the short-term effects of aid-financed fiscal expansions. We distinguish between spending the aid, which is under the control of the fiscal authorities, and absorbing the aid-using the aid to finance a higher current account deficit-which is influenced by the central bank's reserves policy when access to international capital markets is limited. The standard treatment of the transfer problem implicitly assumes spending equals absorption. Here, in contrast, a policy mix that results in spending but not absorbing the aid generates demand pressures and results in an increase in real interest rates. It can also lead to a temporary real depreciation if demand pressures are strong enough to threaten external balance. Certain features of low income countries, such as limited participation in domestic financial markets, make a real depreciation more likely by amplifying demand pressures when aid is spent but not absorbed. The results from our model can help understand the recent experience of Uganda, which saw an increase in government spending following a surge in aid yet experienced a real depreciation and an increase in real interest rates. ER -